Upcoming 2025 Regulation Modification Eliminates Major Hurdle for Contributions to Retirement Funds by Part-Time Employees
Retiring on a budget can be tricky for many workers, even those with stable, full-time jobs. But part-time employees experience unique hurdles. Due to earning less income than their full-time colleagues, they often struggle to put aside money for their future. In some situations, they might not have any surplus funds after covering their monthly expenses.
Even when they manage to scrape together some extra funds, part-time workers frequently face limitations on where they can store these savings. However, a new regulation set to take effect in 2025 aims to make this challenge less daunting.
More part-time employees will qualify for 401(k)s
At present, employers can restrict 401(k) eligibility to employees who meet one of two conditions: They've been with the company for a year, working at least 1,000 hours, or they've been with the company for a total of three years, with at least 500 hours of work per year. Consequently, part-time workers who meet these requirements might already be eligible for their employer's 401(k) plan.
Starting in 2025, the three-year requirement for part-time workers will be reduced to two years. Employees still need to work at least 500 hours annually. Pre-2021 service does not factor into eligibility, and collective bargaining agreements are exempt from this adjustment. However, 403(b) plans must adhere to the new rules in the same manner as 401(k)s.
This change may not significantly impact some part-time workers. If they lack the income to save for retirement in any account, access to a 401(k) will not improve their situation. However, it could be advantageous for those who can save some money, particularly when the plan offers an employer matching contribution.
The rule change could also be beneficial for individuals paying off student debt if their employer's 401(k) has a provision enabling the company to contribute to the employee's retirement account when the employee makes qualifying student loan payments. This option became available in 2024, meaning many companies may not offer this perk yet. However, it may gain popularity in the future.
Alternative retirement savings options
If a part-time worker does not have access to a 401(k) or is not satisfied with their employer's plan, several alternative options exist:
Individual Retirement Account (IRA)
People can establish an IRA independently and contribute funds as they can afford to. The contribution limit in 2024 is $7,000 for individuals under 50 or $8,000 for those 50 and older. These limits will remain the same in 2025.
IRAs do not offer employer matching contributions, but they provide flexibility to invest as desired. Users can choose between deferring taxes until retirement with a traditional IRA or paying taxes upfront with a Roth IRA, allowing for tax-free distributions in retirement.
An IRA can be an excellent option for married couples, as one partner may contribute to the other's IRA if they earn enough during the year. This is known as a spousal IRA and can help the part-time spouse grow their retirement savings, even if their income isn't enough to fund their IRA on their own.
Health Savings Account (HSA)
HSAs were designed for medical expenses, but they function as retirement savings vehicles as well. To contribute, you must have a health insurance plan with a minimum deductible of $1,600 for individuals or $3,200 for families in 2024. These limits will grow to $1,650 and $3,300, respectively, for 2025.
If you qualify, you can contribute up to $4,150 for an individual plan in 2024, while families with a qualifying plan can contribute up to $8,300. The limits will reach $4,300 and $8,550 for individuals and families, respectively, in 2025. Adults aged 55 and older may add $1,000 to these limits in both years.
HSA contributions lower taxable income, just like traditional IRA or 401(k) contributions. Medical withdrawals remain tax-free at any age. The principal benefit for retirement savers is the opportunity to make non-medical withdrawals without a 20% penalty once they turn 65. These withdrawals will still be taxed, though.
One can invest in various plans or switch between plans, depending on their preferences. Prioritize a retirement savings strategy and adjust accordingly as 2025 approaches.
Despite the upcoming regulation that allows more part-time workers to qualify for 401(k)s, some may still struggle with retirement savings due to limited income. In such cases, they can explore alternative options like Individual Retirement Accounts (IRAs) or Health Savings Accounts (HSAs). With an IRA, individuals can make contributions up to $7,000 or $8,000, depending on age, in 2024 and 2025, respectively, without employer matching. HSAs, designed for medical expenses, can also serve as retirement savings vehicles, offering tax advantages and flexibility for non-medical withdrawals after age 65.
