Are Part-Time Employees the New Compliance Minefield? Understanding the 500-Hour Rule

When it comes to retirement plan compliance, the landscape is always shifting—and one of the most overlooked (and potentially costly) changes for employers has to do with part-time workers. Thanks to updates from the SECURE Act and the SECURE 2.0 Act, part-time 401(k) eligibility is no longer a gray area—it’s now a compliance flashpoint.

At LSC Financial, we’re seeing more and more employers struggle with how to correctly track and manage 401(k) eligibility for part-time employees. If you’re not careful, the so-called “500-hour rule” could trip you up and lead to penalties, plan corrections, or even legal challenges.

Let’s break down what this rule means, who it applies to, and how your business can stay compliant while keeping your retirement plan running smoothly.

What Is the 500-Hour Rule?

The “500-hour rule” comes directly from the SECURE Act of 2019, with additional updates in the SECURE 2.0 Act of 2022. Its goal? To expand retirement plan access to long-term, part-time employees—a group that has traditionally been excluded from 401(k) plans due to minimum service requirements.

Here’s how it works:

• Starting in 2024, employees who work at least 500 hours per year for three consecutive years (2021–2023) must be allowed to contribute to your 401(k) plan, even if they don’t meet the traditional 1,000-hour threshold.

• Beginning in 2025, the three-year requirement drops to two years, thanks to SECURE 2.0.

• These employees must be at least 21 years old and meet other general plan requirements.

📌 Important: While these part-time workers must be allowed to contribute, employers are not required to offer matching or nonelective contributions to them—unless your plan document says otherwise.

Why This Matters for Plan Sponsors

On the surface, the rule seems simple. But in practice, it creates a major compliance burden for plan sponsors—especially those using payroll or time tracking systems that don’t flag part-time workers consistently.

Many employers now face questions like:

• Are we tracking hours correctly for part-time employees?

• Are our systems identifying employees who cross the 500-hour threshold?

• Are we updating our plan documents to reflect new eligibility requirements?

These aren’t small questions. Failing to comply with the new part-time 401(k) eligibility rules can result in:

• Plan qualification issues

• Missed deferral opportunities

• Penalties and required corrective contributions

• Increased audit risk from the DOL or IRS

At LSC Financial, we work with clients to proactively audit their employee classifications and tracking methods to ensure they’re ahead of these changes—not scrambling to catch up later.

Who Is Affected?

If your company has part-time, seasonal, or variable-hour workers, this rule applies to you. Industries like retail, hospitality, healthcare, and education are particularly affected—but even professional firms with interns or contract workers should take note.

This isn’t just about “low-hour” employees. It’s about consistency. Someone working just under 10 hours per week could still hit 500 hours in a year. Over two or three years, that could add up to unexpected eligibility.

How to Comply with the 500-Hour Rule

Complying with this new rule involves more than just updating a spreadsheet. It requires a multi-step strategy that includes documentation, payroll coordination, plan design, and ongoing monitoring.

1. Review Your Plan Document

First, check your plan’s eligibility language. Does it reflect the updated SECURE Act provisions? If not, you’ll need to amend it—ideally with the help of a third-party administrator (TPA) or retirement consultant like LSC Financial.

✅ Pro Tip: Even if your plan excludes part-time employees based on service hours, you must still allow eligible workers under this rule to make salary deferrals.

2. Track Hours Accurately

You need to track actual hours worked, not just assume based on job titles or classifications. This includes:

• W-2 employees

• Part-time or seasonal staff

• Interns, if applicable

Most payroll systems can be customized to flag employees who are approaching the 500-hour threshold. If yours can’t, it’s time to upgrade—or get a compliance partner who can help manage this process.

3. Implement a Monitoring System

Set up a quarterly or monthly review of employee hours so you’re not surprised at the end of the year. Flag employees who are on track to become eligible, and prepare for enrollment notifications and deferral setups.

LSC Financial offers clients automated monitoring tools and compliance alerts to help avoid last-minute surprises.

4. Educate Your HR and Payroll Teams

Make sure your HR and payroll staff understand the rule, how to track it, and when to notify employees of their eligibility. Compliance doesn’t happen in a vacuum—it requires cross-departmental coordination.

5. Plan for Enrollment and Communication

Once a part-time employee becomes eligible, you must:

• Provide enrollment materials

• Offer the opportunity to make deferrals

• Include them in annual notices (like Safe Harbor or QDIA notices, if applicable)

Even if you don’t offer a match, these employees must be treated like other eligible participants when it comes to communication and enrollment timelines.

Common Pitfalls to Avoid

🔻 Failing to Amend Your Plan
Many sponsors forget to revise their plan documents to include the 500-hour rule. This could create compliance issues in an audit.

🔻 Assuming “Part-Time” = Ineligible
Job title alone isn’t enough. Hours worked matter most.

🔻 Ignoring Recordkeeping Coordination
Your recordkeeper and payroll provider must be aligned. If they’re not, you risk missed contributions or errors in eligibility tracking.

How LSC Financial Helps Plan Sponsors Stay Compliant

At LSC Financial, we specialize in helping employers navigate the complex world of retirement plan compliance. From document review and eligibility tracking to employee communication and DOL audit prep, we’re your partner in proactive plan management.

Here’s how we support you with the 500-hour rule:

• Audit and update plan documents

• Coordinate with payroll systems to track hours

• Create alerts and dashboards to flag upcoming eligibility

• Provide employee education materials and enrollment support

• Act as a co-fiduciary to help reduce compliance risks

Final Thoughts: Don’t Let Part-Time Eligibility Catch You Off Guard

As more businesses rely on flexible workforces, part-time 401(k) eligibility is quickly becoming a compliance minefield. The 500-hour rule isn’t going away—in fact, it’s tightening in 2025. Employers who plan ahead will avoid costly corrections, maintain plan integrity, and create a more inclusive retirement benefit for their workforce.

Let LSC Financial help you take control of compliance, stay ahead of regulatory changes, and protect the future of your retirement plan.

Ready to assess your part-time employee tracking system?

Contact LSC Financial today for a compliance review and let’s ensure your 401(k) plan is built for today’s workforce—and tomorrow’s rules.