Even the Interns?

The breadth of retirement plan coverage may surprise both plan sponsors and those who work for or with them…but in situations in which employers are not legally obligated to offer retirement or healthcare coverage, is there a logical argument for offering retirement and healthcare coverage to interns outside of simple altruism? The answer is absolutely.

The breadth of retirement plan coverage may surprise both plan sponsors and those who work for or with them. When it comes to retirement plans, defining and identifying eligibility is the first step to figuring out a plan’s scope. Some plans exclude demographics that are less likely to participate, like part-timers or young workers. However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act will require that long-term part-time employees, defined as an employee who worked between 500-999 hours for three consecutive years, will be eligible for their employer’s 401(k) plans by 2024.[1] This means that employers must start counting hours toward eligibility beginning this year, though plan sponsors are of course welcome to include them earlier, or simply allow them to make personal contributions to avoid the time-consuming task of tracking hours.[2] Especially with the changes enacted by the SECURE Act, it’s essential for sponsors to be intimately familiar with their plan documents and have a crystal-clear understanding of eligibility to avoid compliance pitfalls.

Like in the example from the SECURE Act above, service requirements like number of hours worked in a set period of time, or years at the company, play an important role in determining eligibility. In regard to interns specifically, it often comes down to whether or not the intern is considered an employee. The primary beneficiary test has been used in court to determine whether an intern is an employee under the Fair Labor Standards Act (FLSA).[3] Essentially, the question “who benefits from this arrangement more, the employer or the intern?” is examined from several angles, and measured by seven different criteria including expectation of compensation (including implications thereof), and “The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.” Therefore, if an intern is paid, they are considered an employee. And as they’re not an excluded group, as long as an intern is at least 21 years old and meets regular employee standards, they can be eligible depending on the scope of the policy.

In addition to 401(K) coverage, the Affordable Care Act (ACA) requires Applicable Large Employers (ALEs) to provide employees working 30 or more hours per week the option to enroll in employer-sponsored group healthcare coverage after the first 90 days they are employed full-time. Now, many interns will be working for shorter periods of time than 90 days, or less than 30 hours every week, meaning that they won’t qualify under these criteria. Some may still wonder, “but in situations in which employers are not legally obligated to offer retirement or healthcare coverage, is there a logical argument for offering retirement and healthcare coverage to interns outside of simple altruism?” The answer is absolutely.

The National Association of Colleges and Employers’ 2020 Internship and Co-Op Survey Report found that for interns in 2020, “the offer rate was 68 percent, the acceptance rate was 81.6 percent, and the conversion rate was 55.5 percent.” Additionally, “the one-year retention rate for intern hires with internal experience is 68.7 percent and 55 percent for those with external internship experience.”[4]

That may not be surprising to many employers, because it simply makes sense.

When interns are brought on for a limited period of time, are trained by the company, and excel, many organizations often extend invitations to return and continue the mutually beneficial learning journey in an almost temp-to-perm arrangement. Especially after what may be a multiyear investment in an intern, who is now significantly more familiar with the company, its processes, and staff (giving them a significant advantage of outside new hires who will have to adjust to the culture shift of their new position), it follows that companies to want to retain them. The job market aside, it’s also logical that interns who need jobs and have actively decided to go back to a company for several years running would want to stay.

Backtracking to the hiring process, the first step to getting those interns (AKA future employees) in the door is by making your organization more appealing than your competitors. And while 50% of employers were offering interns company-matched 401(k) plans in 2017, that number was nearly cut in half by 2019, the most recent year for which data is available, to 25.7%. The same happened with medical insurance: 48.1% of employers offered these benefits in 2017, a number that dropped a shocking 30.6 percentage points to 17.5% in 2019.[5] Looking at this from an ROI perspective, if interns are frequently hired back, or even more so if a job offer is made but declined, it may be worthwhile for plan sponsors to reconsider the benefits they’re offering to entice the next generation to stay the course with them.

[1] https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/who-is-a-long-term-part-time-employee-401k-plans-need-to-know.aspx

[2] https://www.planadviser.com/secure-act-dictates-long-term-part-time-employees-need-included-retirement-plans

[3] https://www.dol.gov/agencies/whd/fact-sheets/71-flsa-internships#2

[4] https://www.naceweb.org/store/2020/internship-and-co-op-report

[5] https://www.naceweb.org/talent-acquisition/internships/social-activities-the-top-benefit-offered-to-interns-co-ops

These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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