Are Employers Required to Offer 401(k) Plans to Hourly Employees?

Whether you earn a salary or get paid hourly, building a retirement nest egg is essential for long-term financial security.

401(k) plans, which offer significant tax advantages, have long been a cornerstone for employees to save and invest for retirement. Historically, many hourly workers were excluded from these valuable benefits.

Thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, employers are now mandated to provide access to 401(k) plans for certain hourly employees. To qualify, employees must be at least 21 years old and have worked a minimum of 500 hours annually for three consecutive years.

Let's dive deeper into the requirements companies must follow and potential changes on the horizon.

Key Points to Remember

• Participation in employer-sponsored 401(k) plans rose following the implementation of the SECURE Act in 2019.
• The SECURE Act requires employers to allow employees who worked 500 or more hours per year for three consecutive years to enroll in 401(k) plans.
• Starting after December 31, 2024, the SECURE 2.0 Act reduces this eligibility period to two years.
• Employees must be at least 21 years old to qualify for participation in an employer's 401(k) plan.

Understanding Hourly Workers’ Eligibility for 401(k) Plans

Traditional 401(k) plans let employees contribute pre-tax income, reducing taxable income, while Roth 401(k)s involve after-tax contributions with tax-free withdrawals during retirement. Many employers also offer matching contributions, enhancing employees' savings.

Employers who offer 401(k) plans must allow all eligible employees to participate, with eligibility typically starting at age 21. Previously, employees needed to complete one year of service, defined as working 1,000 hours or more in 12 consecutive months, which excluded many hourly workers.

Now, employees working 500 or more hours annually for three consecutive years qualify as long-term part-time employees eligible to participate.

How the SECURE Act Expanded 401(k) Access

According to the U.S. Bureau of Labor Statistics, in 2021, 76.1 million workers aged 16 and older—representing 55.8% of wage and salary workers—were paid hourly. To increase retirement savings opportunities for these workers, the SECURE Act lowered the hourly threshold from 1,000 to between 500 and 999 hours annually over three years.

The SECURE 2.0 Act, passed in 2022, further reduces this requirement to two years for plans effective after December 31, 2024.

Defining an Hourly Employee

In the U.S., hourly employees are compensated based on the number of hours worked and must receive overtime pay at 1.5 times their regular rate for hours worked beyond 40 per week. Conversely, salaried employees receive a fixed annual salary and are generally not eligible for overtime pay.

Are Employers Legally Obligated to Offer 401(k) Plans?

Federal law does not require employers to provide 401(k) plans. However, 17 states have enacted legislation supporting retirement plan offerings. If an employer chooses to provide a 401(k), they must offer it to all eligible employees without discrimination.

When Can Employees Withdraw from Their 401(k) Without Penalties?

Employees can begin penalty-free withdrawals from their 401(k) plans at age 59½, according to IRS regulations. Additionally, required minimum distributions (RMDs) from traditional 401(k) plans must commence by age 73 at the latest.

Conclusion

Employers offering 401(k) plans are now required to extend participation opportunities to qualified hourly workers. Legislative changes have lowered the eligibility threshold, enabling more hourly employees to benefit from employer-sponsored retirement plans.

Despite these improvements, many hourly workers in the U.S. remain excluded from such benefits, highlighting ongoing challenges in expanding retirement savings access.

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