When it comes to 401(k) administration, keeping track of eligibility can be one of the biggest challenges, especially if you have a lot of employees. Depending on your plan, overseeing 401(k) eligibility may require you to track total service hours for every employee, start dates, termination dates, birth dates, state of residence, job status — it’s a lot! But this post should help you get a handle on everything you need to know.
Let’s take a closer look at 401(k) eligibility, potential pitfalls, and best practices for simplifying your plan’s administration.
401(k) Eligibility: What It Is and Why It’s So Important
Internal Revenue Code defines specific regulations for 401(k) plan eligibility, such as
who can participate in your 401(k) retirement plan, when they can participate, whether they get employer plan contributions, and when they’re eligible to receive those contributions.
As you can imagine, 401(k) plan eligibility rules have major implications for your plan’s success. They can make or break a plan — both in terms of the work required to run it (and avoid a compliance error), and in the overall success and usefulness of the 401(k).
Here are the top reasons why getting 401(k) eligibility right is so important:
Eligibility requirements impact your workload
Eligibility requirements can have a large impact on your 401(k) administration workload. A complex eligibility situation means more on your plate at the end of the day.
Eligibility has consequences for nondiscrimination testing
Eligibility requirements are often set with 401(k) nondiscrimination testing in mind. The requirements for being eligible to participate in a businesses 401(k) plan can help exclude employees who typically won’t participate (like minors and part-time workers).
401(k) plan eligibility mistakes can be costly
The eligibility management process can be tedious, as you have to:
- Track when employees become eligible to join the plan
- Manage the enrollment of newly eligible employees
- Track when employees become eligible to receive employer contributions
- Oversee and distribute eligibility notifications
- Maintain compliance with Internal Revenue Code eligibility requirements
It’s a lot to stay on top of, and making a mistake is easier than you think.
For instance, if you fail to notify an employee of their eligibility, and they would’ve enrolled if they had known, your company might be on the hook to make what could be a sizable contribution to your employee’s retirement account.
And on top of that, the process of uncovering these mistakes — often during a 401(k) plan audit — isn’t enjoyable either.
Now that we have your attention, let’s dive into how 401(k) eligibility actually works.
401(k) Eligibility Requirements for Enrollment
You can be as lenient as you wish with 401(k) eligibility requirements. However, the Internal Revenue Code limits how restrictive your plan’s eligibility requirements can be.
Age and service requirements
If you have a 401(k) plan, you must offer it to workers age 21 and over who have 1,000 hours of service in a 12-month period or 500 hours of service per year for three consecutive years. You can also offer enrollment to employees who have reached the “age of majority,” which is the age at which states permit a person to enter into a contract. In most states, that age is 18.
Rehire eligibility requirements
If a 401(k) plan offers a time-elapsed method, then it’s subject to a “service spanning” rule. This rule means that if an employee quits or is terminated without completing a year of service, and is rehired less than a year from their separation date, they would be eligible for participation, provided enough time has passed from their original date of hire and their return date.
Eligibility vs. entry dates
An eligibility date is when an employee has satisfied all requirements for plan participation. An entry date is when you enroll them in the plan. For example:
Your new hire is older than 21 and reaches 1,000 hours of service on February 12, which is their eligibility date. Your plan is set up for quarterly entry dates, so your employee’s plan entry date is April 1.
401(k) Eligibility and Employee Entry Dates
Entry dates determine when, after attaining eligibility, the employees are able to be enrolled into the plan.
Though there aren’t specific requirements for your entry dates, these can have a greater impact on your 401(k) administration workload than any other aspect of 401(k) eligibility.
Frequent or immediate entry dates, for example (while attractive to participants), necessitate remembering and tracking a variety of dates and eligibility schedules. Naturally, the more employees you have, the more variation, and the more burdensome this ongoing task becomes.
Eligibility Requirements for Employer Contributions
There are also employee eligibility requirements to consider for employer contributions, whether matching or nonelective:
Minimum age and service requirements
Employers may set minimum age requirements or service requirements that employees must meet before becoming eligible for employer contributions. The age and hours-of-service mandates are the same for matching contributions as they are for general eligibility. However, if employer contributions are 100% vested immediately, employers may require two years of service before making contributions to the employee’s 401(k) plan.
“Last day” and minimum hours requirements
Employers also have the option of mandating that employees be employed on the last day of the year, or have worked a minimum number of hours that year in order to access any employer contributions from that year. Safe Harbor plans, however, may not impose these additional requirements.
Here’s a breakdown showing how common these types of requirements are:
401(k) Eligibility Exclusions
Though 401(k) plan eligibility requirements restrict who employers may exclude from the plan (or for how long), there are several categories of employees that may be (and often are) outright excluded from participation. These may include:
- Union members
- Nonresident foreign employees
- Independent contractors
- Specific classes (interns, seasonal workers)*
Although you may exclude specific classes from the plant, they won't be excluded from your annual nondiscrimination tests.
Required 401(k) Plan Eligibility Notices
A major part of the 401(k) eligibility workload is managing employee eligibility notifications (in addition to the regular annual or plan change notices).
*exactly how tedious this is, depends, among other things, on your entry dates.
In addition to sending these notifications prior to an employee’s eligibility into the plan, many of these notices must also be delivered annually, 30 days before the beginning of the new plan year.
Tips for Handling 401(k) Eligibility Quickly and Correctly
Simplify age requirements
Age requirements add another element of employee information to track. If you offer a more generous age requirement than what the Internal Revenue Code Requires (age 21), that could increase your admin workload.
For example, assume you’ve decided to make 18 the age at which employees can enroll, but you have remote workers throughout the United States. You’d have to confirm that the states where your workers live allow them to participate at age 18. Some states define the age of majority as 19 or 21.
Avoid running multiple 401(k) eligibility cycles if possible
Dual eligibility cycles (for instance, one for enrollment, one for employer contributions) can help businesses tailor their plans to better fit their employee situation, but they also double the work you need to do.
Businesses may also have different eligibility requirements (and plan offerings) for different types of employees. Full-time employees, for example, may be eligible after only a month, while part-time employees (who are more likely to leave the business or not contribute to the plan) may be required to wait a year. This type of structure means you have to keep track of two (or more) different eligibility systems and enrollment schedules, which means pulling at least two reports every time a plan entry date approaches.
Limit entry dates
When it comes to eligibility administration, employee 401(k) entry dates can have one of the biggest impacts on your workload.
For example, immediate entry means that the exact date an employee becomes eligible depends on when they were hired. That means you have to keep track of a different date for every employee — a situation that gets more overwhelming as your company grows.
If you set up monthly, quarterly, or semi-annual entry dates, employees can join only on certain days of the year, which means you’ll know exactly when to send eligibility notices.
Automate your 401(k) eligibility tracking
Some forward-thinking 401(k) providers are already offering automated eligibility tracking. They’ll keep track of your employees — when they were hired, and when they become eligible — and will then send notices as required. As you can imagine, this can save you a lot of time and all but eliminate the risk of making a mistake.
Work With ForUsAll
Like everything in 401(k) administration, eligibility is a lot to manage. But with knowledge about your plan design and a few best practices, you can keep things from getting out of control (or out of compliance).
If managing eligibility seems like a daunting task, consider ForUsAll’s all-in-one 401(k) solution. We can handle all the day-to-day busywork that goes into running a 401(k), including tracking eligibility and sending required notices.