This 2025 Law Change Will Ease a Key Barrier to Retirement Savings for Part-Time Workers

Saving for retirement is challenging for a lot of workers, including those with steady, full-time employment. But part-time workers face unique challenges. Since they typically earn less income than full-time workers, they have less cash available to save for their futures. In some cases, they may not have anything to spare after paying their monthly bills.

Even those who do manage to free up some extra cash are often limited in where they can keep it. But a new rule change taking effect in 2025 will make this second issue a little easier to overcome.

More part-time workers will be eligible to participate in 401(k)s

Under current law, employers can restrict 401(k) plan eligibility to only those employees who meet one of two criteria: Either they work for the company for one year in which they complete at least 1,000 hours of service or they work for the company for three years in which they complete at least 500 hours of service in each year. So some part-time workers may already qualify for their employer’s 401(k) plan.

But beginning in 2025, the three-year service requirement for part-time workers will drop to two years. You must still work at least 500 hours each year. Pre-2021 service does not count when considering your eligibility. Also, collectively bargained plans do not have to abide by this rule change. However, 403(b) plans must adhere to the new rules just like 401(k)s.

This might not change much for some part-time workers. If you lack adequate income to save for retirement in any account, gaining access to a 401(k) won’t improve your situation. However, it could be beneficial to those who are able to save a little, especially if the plan offers an employer matching contribution.

The rule change could also be valuable to those paying off student loan debt if their employer’s 401(k) has a provision that enables the company to make matching contributions to the employee’s retirement account when the employee makes qualifying student loan payments. This 401(k) rule change went into effect in 2024, so there are likely many companies that don’t offer this option. But it could grow in popularity over time.

Alternative retirement accounts you can use

If you don’t have access to a 401(k) or you don’t think your employer’s 401(k) is the right fit for you, you have some other options:

IRA

You can open an IRA on your own and contribute money as you’re able to. You’re allowed to set aside up to $7,000 here in 2024 if you’re under 50 or $8,000 if you’re 50 or older. These limits will remain the same in 2025.

IRAs don’t offer employer matches, but they give you a lot of freedom to invest how you want. You can also choose whether you want to defer taxes until retirement with a traditional IRA or pay taxes upfront with a Roth IRA so you can enjoy tax-free distributions in retirement.

An IRA is also a great option for married couples because one partner can contribute to the IRA of their spouse as long as that partner earned enough during the year to cover all the contributions to both spouses’ retirement accounts. This is known as a spousal IRA and it could help the part-time spouse build their retirement savings even if their income isn’t adequate to fund their IRA on their own.

Health savings account (HSA)

Health savings accounts (HSAs) are designed to hold medical savings, but they work for retirement savings as well. To contribute to one, you must have a health insurance plan with a deductible of at least $1,600 for individuals or $3,200 for families in 2024. These limits will rise to $1,650 and $3,300, respectively, for 2025.

If you qualify, you can save up to $4,150 if you have a qualifying individual plan in 2024 while those with qualifying family plans can save up to $8,300. In 2025, these limits will rise to $4,300 and $8,550, respectively. Adults 55 and older may add $1,000 to these limits in both years.

HSA contributions reduce your taxable income, just like traditional IRA or 401(k) contributions. Medical withdrawals are also tax-free at any age. But the real benefit for retirement savers is that you can make non-medical withdrawals without paying the 20% penalty once you turn 65. You’ll still owe income taxes on these withdrawals, though.

You don’t have to limit yourself to a single plan, either. You could use your 401(k) until you claim any available matching contribution, then switch to an IRA. Or split your savings between an IRA and HSA as you see fit. It’s best to have a strategy in mind, though. Think about where the money will do you the most good and be ready to enact your plan as we move into 2025.