401(k) plan design: deciding who’s eligible

1 Age requirement

While not required, you have the option to set a minimum age for plan participation. The only rule is that you can’t exclude employees over age 21. Other than that, you can choose any age you want.  

2 Service requirement

Although not necessary, you can set a minimum service requirement for your 401(k) plan. Generally, this can’t be more than one year of service, with special rules for long-term, part-time employees. If your plan includes both an age and a service requirement, employees must meet the later of the two conditions to become eligible.

3 Entry date

You have to decide when employees can join your plan. Can they participate immediately on the date of hire, or do they have to wait? If you choose a delayed entry date, employees must be allowed to join the earlier of:

• The first day of the plan year after they meet any age and service requirements
• Six months after they meet any age and service requirements

4 Contribution types

Different types of contributions can have different eligibility requirements. For example, you can have immediate eligibility for elective deferrals, while requiring one year of service for the company match.

5 Employee exclusions

You can impose other conditions not related to age and service, which may be helpful if you’re a small business owner. Common exclusions include:

• Job category, such as hourly versus salaried
• Job location
• Job title or description
• Employees under a collective bargaining agreement (union members)
• Some nonresident aliens

Part-time or seasonal employees can’t be excluded as a category, although they would be excluded if their status causes them to fail to meet a minimum hours requirement during an eligibility computation period.

6 Testing

Exclusions can make it difficult to pass the ERISA Section 410(b) coverage test, which takes into account employees who’ve satisfied the plan’s minimum age and service requirements but have been excluded for some other reason. Exclusions, and all other eligibility provisions, should be decided on with advice from your plan consultant or ERISA counsel.

401(k) eligibility rules and retirement readiness

The sooner employees can begin saving for their future, the better off they may be at retirement. You can affect this greatly with your eligibility rules, but the plan has to work for both you and your employees. By considering these six factors plus benchmarks within your industry, company culture, overall benefits strategy, and the job market, you can design eligibility rules that are the best fit for your plan.