Many small businesses rely on part-time employees to help them operate efficiently. They don’t require full-time employees, at least not for all positions. According to the U.S. Bureau of Labor Statistics, there were more than 27 million part-timers in the third quarter of 2023. Federal laws may require you to offer some benefits and you may choose to offer others. Here’s what you need to know.
Overview of part-timers
Who is a part-timer? It used to be up to employers to fix this status based on the number of hours worked, with many setting a minimum of 20 hours per week as the schedule for part-timers. The Fair Labor Standards Act, which is the law governing minimum wage and overtime rules, doesn’t have a set standard, but overtime rules don’t apply until an employee works more than 40 hours in a workweek. The Bureau of Labor Statistics refers to part-timers as those working one to 34 hours per week. Part-timers have always been included in figuring your workers compensation and unemployment tax. But now various federal laws refer to part-time workers and require employers to take them into account.
Under the Affordable Care Act (ACA), the employer mandate requires applicable large employers (ALE) to offer health coverage or pay a penalty. An ALE is an employer with at least 50 full-time and full-time equivalent employees. Thus, in making the determination of whether a business is subject to the employer mandate, part-timers must be counted.
For ACA purposes, a full-time employee is anyone working at least 30 hours per week (or at least 130 hours per month). So, a part-timer is anyone working fewer hours. Part-timers become full-time equivalents by adding up their hours (but not more than 120 per worker per month) and then dividing the total by 120.
Note that even if part-timers make a company an ALE, health coverage is only mandated for full-time employees. Of course, employers may choose to offer health coverage to part-timers.
Until now, employers with qualified retirement plans were only required to allow full-time employees to participate in the plans. SECURE Act 1.0 makes part-timers eligible to participate. This means that 401(k) plans must allow long-term part-timers this option. A “long-term part-timer” is any employee who is at least age 21 and who meets a 500-hour rule (explained below).
Even though long-term part-timers must have the option to participate, employer matching of contributions for part-timers is not mandatory. If an employer chooses to do so, then vesting is based on a year of service, defined for this purpose, as working at least 500 hours during a 12-month period.
How the 500-hour rule works. Effective for part-timers on the payroll in 2021, there is a 3-year rule. Count the hours in 3 consecutive years starting in 2021, which means those meeting this criterion are eligible to participate in a company’s 401(k) plan beginning in 2024.
SECURE Act 2.0 reduced the years to 2 years, so that anyone meeting the 500-hour threshold in 2023 and 2024 will be eligible to participate beginning in 2025.
Small businesses may wish to extend certain employee fringe benefits to part-timers. For example, they can allow these workers to accrue paid time off (vacation, sick, and personal days) based on the hours worked. They can allow part-timers to telecommute on the same terms offered to full-time employees if this arrangement works for the company. The decision for offering benefits depends, of course, on cost, company culture, and other factors.
If you employ part-timers because this fits your business needs, be sure to consider the benefits offered to them and review your budget with your CPA. If you’re unsure of your obligations, check with an employment law attorney.
Read more about employee benefits here.