DC plan sponsors not complaining about coverage for part-time workers
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July 08, 2019 12:00 AM

Sponsors OK with efforts to expand access for part-timers

Margarida Correia
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    Diann Howland
    Elliott O'Donovan
    Diann Howland sees Congress as ‘thoughtful’ for helping individuals without unduly burdening plan sponsors.

    A mandate in the SECURE Act requiring employers to extend 401(k) plan coverage to more part-time workers is something plan sponsors are willing to live with, according to industry groups.

    "I don't think anybody is jumping up and down and saying we love it, but neither is anybody jumping up and down and saying we hate it," Greg Long, Alight Solutions' Washington-based public policy leader, said of the proposed new requirement in the Setting Every Community up for Retirement Enhancement Act.

    Under the pending legislation, plan sponsors will have to open their 401(k) plans to employees who work at least 500 hours a year for three consecutive years. Currently, they must provide plan access to employees who work at least 1,000 hours a year, or about 19 hours a week.

    With the current 1,000-hour requirement, many part-time workers are unable to qualify for their company's 401(k) plan even if they've consistently worked there for years, a problem that the provision seeks to address.

    "If somebody works 700 hours a year for three years under the current law, you could keep excluding them indefinitely," said Kent Mason, a partner with law firm Davis & Harman LLP in Washington.

    The legislation aims only to open plans to more part-time workers. It will not require sponsors to make employer contributions to the 401(k) accounts of part-time employees working 500 to 1,000 hours nor will it require sponsors to include the part-timers in their non-discrimination testing, measures that helped assuage plan sponsor concerns, according to industry experts.

    "Congress has been very thoughtful in trying to craft a provision so that it helps individuals, but it doesn't create burdens on the plans because you don't have to include the part-time workers for the purposes of non-discrimination testing and there are no required contributions," said Diann Howland, vice president for legislative affairs at the American Benefits Council in Washington.


    ‘Never happy'

    Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington, also said that the proposal addresses a lot of plan sponsor concerns but noted that sponsors are "never happy about a mandate in the ERISA context."

    "The concern that remains is that this becomes a slippery slope of additional requirements under ERISA and 401(k) plans," she said.

    The SECURE Act legislation was overwhelmingly passed in the House on May 23 and is pending approval in the Senate, which also has its own bill, the Retirement Enhancement Savings Act, or RESA. Shortly after the House's vote, the Senate decided to forgo passing RESA and take up the SECURE Act instead. RESA does not include the SECURE Act's provision on long-term part-time workers.

    Many sponsors already allow part-time employees working fewer than 1,000 hours to participate in their 401(k) plans, but the number has fallen over the past five years, according to the Plan Sponsor Council of America's 61st annual survey of profit-sharing and 401(k) plans. In 2018, 61% of sponsors gave hourly part-time workers with fewer than 1,000 hours of service access to their companies' 401(k) plans. In 2013, 70% did.

    While an analysis of how many more part-time workers will be covered as a result of the change was not readily available, experts agreed that coverage would improve but likely not to a significant degree. "It would narrow the coverage gap but the impact would be relatively small," said Alicia Munnell, director for the Center of Retirement Research at Boston College.

    Whatever the impact may ultimately be, plan sponsors are not opposing the measure largely because it's aimed at long-term, part-time employees and not temporary or seasonal workers. Initially, there was concern among plan sponsors that the provision would include part-timers with very brief tenures, but the requirement that they be with their employers for three straight years helped eliminate those concerns, said Will Hansen, chief government affairs officer for the American Retirement Association in Arlington, Va.

    Still, support for the measure is not universal, with some fretting about the added administrative burdens the new requirement will entail, according to industry groups.

    "There's a general concern in the record-keeper arena that this may at the beginning be a little bit of a headache to implement," Mr. Hansen said of the administrative challenge of tracking eligibility for the new group of workers.

    Others noted that plan sponsors will have yet another group of employees that they have to send statements and notices to about the plan in addition to adjusting their payroll processes, which may be extensive for some employers.

    "From an administrative perspective, it's very hard," said Robyn Credico, Willis Towers Watson PLC's North America defined contribution practice leader in Arlington, Va. "You're going to have to track hours for three years before determining eligibility under the new rules, which is going to create burdens."

    The new provision would also increase costs, Ms. Credico said. Even though the legislation does not require plan sponsors to make employer contributions to the 401(k) accounts of the new group of part-time workers, employers will nevertheless feel compelled to do so. "Practically speaking, it's not likely employers would say, 'You can contribute to my plan but you're not going to get a match.'"

    She also noted that administrative costs will rise as a result of having more people in the plan. "You still have to pay per-participant fees and you still got payroll issues and everything else," she said.

    What's more, she said, the new requirement will likely lead to the creation of small accounts, which carry higher administrative costs. When record keepers bid on plans, they look at the average size of the accounts. "If you lower the average account balance, that's going to increase your record-keeping cost," Ms. Credico said.


    Burden for some

    For sponsors with a high percentage of employees working 500 to 1,000 hours, the new requirement may be particularly painful. Many might rethink their rewards or benefits strategies for part-time workers or possibly even outsource them through a temp agency as a result of the new rule, said Jack Towarnicky, the Columbus, Ohio-based executive director of the Plan Sponsor Council of America.

    "If there's a significant number of employees at a particular employer … who would become eligible under these new requirements, the employer would be more likely than others to reconsider the benefits strategy," Mr. Towarnicky said.

    Overall, though, plan sponsors support the new requirement in light of the broader retirement policy goals that the SECURE Act is trying to achieve, according to industry analysts.

    "Hopefully we will get this legislation across the finish line soon," Mr. Hansen said.

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