The Plan Document Defines Eligibility

Before your employee becomes a participant in your 401(k) Plan, they must satisfy the 401(k) eligibility requirements, as written in your Plan’s document. The Plan document is the rule book for how you want to administer your Plan within the confines of IRS rules. You can always amend your document in the future, but you always must follow its written provisions in the present.

401(k) Plan Eligibility

In designing your 401(k) Plan’s eligibility requirements, you have many choices

You can institute a minimum age requirement up to age 21
You can institute an hours of service requirement up to 1,000 hours in their first 12-month period
You can do a combination of both

You also have flexibility on the dates new participants enter the Plan after they satisfy the eligibility requirements.

You can decide to have the most restrictive entry dates of twice a year where it is commonly done as the first day of the year and the first day of the seventh month
You can decide to have them come in the day they satisfy the eligibility requirements
You can decide to have them enter the first of the month or the first of the quarter following their satisfaction of the requirements

In addition, you can exclude certain types of employees from your Plan but that must be defined in the Document and you’ll have to annually prove such exclusions are non-discriminatory.

Whatever requirements you decide on in your Document, those become your Plan’s rules and are to be applied to all employees without waver.

Cares Act 401(K) Withdrawal Eligibility

If you’re out of work and need income, you may be considering withdrawing from your retirement savings. Normally, if you withdraw money from traditional Individual Retirement Accounts (IRA) and employer-provided accounts before reaching age 59 ½, you have to pay a ten percent early withdrawal penalty. The Cares Act 401(k) has temporarily changed the rules, by giving you more flexibility to make an emergency withdrawal from tax-deferred retirement accounts during 2020.

You can also learn more about the impact of Covid-19 on retirement savings, by checking out our blog posted on February 23, 2021.

Clarify Your Goals and Your Company’s Environment

Once the employee satisfies the 401(k) eligibility requirements and enters the Plan on the next entry date, they are a participant in the Plan going forward regardless of whether they have an account balance. As a result, when designing your 401(k) plan eligibility requirements, you want to consider the population of your employee base and the staff you are asking to administer the Plan everyday:

Do your employees stay around or are they there for a short time and move on?
In general, are your employees at a point in their lives where saving for the future is important?
Can your administrative staff reasonably administer the eligibility requirements as written in the Document?
Are you trying to exclude otherwise includable employees with little chance of passing non-discrimination rules?

Being too liberal in allowing employees in can have unintended and costly results and being too restrictive may be a barrier to healthy participation.

When designing a Plan with a retirement service professional, it is best to be clear on what your goals are for offering the Plan in regard to your employees, understanding your options to meet those goals, and what effects those choices result in so that you can adjust any expectations up front

The answers to these questions can lead you to the design that best fits the goals as you can have:

A Traditional 401(k) Plan that is subject to general non-discrimination testing each year and generally works when there is strong participation from the lower-paid staff
A Safe Harbor Plan design that guarantees a specified contribution amount so non-discrimination testing for 401(k) deferrals and Employer Match contributions are avoided even with weak participation from the lower-paid staff
An Auto-Enrollment and/or Auto Escalation design that increases the participation rate of a traditional 401(k) plan design to increase the chances of passing the general non-discrimination tests without the guarantee of contributions that a safe harbor design requires

Additionally, once the 401(k) eligibility provisions and design type are decided upon you can then decide what requirements you may want to attach to non-safe harbor employer contributions such as match or profit sharing.

Should everyone receive these contributions?
Should only those who have worked 1,000 hours receive them?
Should only those employed on the last day of the Plan year receive them?

401(k) Eligibility Problems

The most common mistake in applying eligibility provisions is not giving eligible employees the opportunity to make deferrals because the terms of the Plan are not being followed. The below chart addresses the situation and the corrective steps

Mistake	Find The Mistake	Fix The Mistake	Avoid The Mistake
Eligible employees weren't given the opportunity to make an elective deferral election (exclusion of eligible employees).	Review the plan document sections on eligibility and participant. check with plan administrators to determine when employees are entering the plan.	Make a qualified nonelective contribution for the employee that compensates for the missed deferral opportunity.	Monitor census information and apply participation requirements.

Whether you are a traditional plan that invites the participant to defer or an auto-enrollment plan that instructs the participant to decline deferring an error can lead to the employer putting in additional money for the participant on top of paying them their salary and the contributions they have earned under the Plan terms.

Every new participant should always be provided at their entry date, the Summary Plan Description and information regarding their options to participate in the Plan. This can be done either electronically or in paper form. No matter the onboarding process, you want to retain proof the employee was informed timely so that any situations can be rectified with little or no additional cost.

Plan Design and Re-Design

Whether you are a new Plan starting up or an established Plan, it is always worthwhile to clarify that your Plan’s provisions fit with your goals and your administration style. There are many aspects that go into designing a plan that works for you and the eligibility provisions is always the first hurdle to jump.

If you would like more information in Plan design services, please contact LT Trust, or call us at (833) 458-4015.

401(k) Plan Eligibility Requirements Guide: Rules, Problems, & Withdrawals