Employers need to be aware of the 401k enrollment eligibility rules. The details of who can participate and when they become eligible should be determined based on your plan goals. Many plan sponsors strive for a happy medium between immediate enrollment and highly restricted or delayed enrollment.
As you seek to attain the right balance, bear in mind that the Employee Retirement Income Security Act restricts your ability to limit eligibility in multiple ways. Here are a few rules to bear in mind:
Age restriction. You don’t have to enroll employees below the age of 21, but you cannot have an age restriction over such age. This may or may not have an impact, depending on your workforce demographics. Many plans either have no age requirement or use age 18 as the minimum age.
Delayed gratification. You can require employees to wait up to only 18 months to enter the plan. This is accomplished by requiring employees to work at least 1,000 hours over the course of a 12-month period to gain eligibility. The plan then provides that, once eligibility is met, entry into the plan is the next semiannual entry date.
For example, suppose your plan operates on a calendar year. You hire Jane on July 2, 2018, and she completes one year of service and the 1,000-hour requirement by July 2, 2019. She would enter the plan as of January 1, 2020.
Category-based standard. Plan sponsors can assign different standards for exempt vs. nonexempt employees. For example, you could set more generous eligibility rules for exempt employees. You might want to do so if the labor market is tight for the types of jobs your exempt employees hold, but not your nonexempt employees.
However, your ability to establish these job classification distinctions is limited by your need to satisfy IRS coverage tests. These tests are designed to prevent discrimination against lower-paid workers.
For example, the percentage of participating non-highly compensated employees (NHCEs) cannot be less than 70% of the participation rate of highly compensated employees (HCEs). In addition, the average benefits received by NHCEs must equal at least 70% of benefits received by HCEs. The average benefits test also features a more subjective nondiscriminatory classification component. You can also create different eligibility rules for union and nonunion jobs, and those distinctions, like the delayed eligibility timing tactic, aren’t subject to the minimum coverage tests.
401k enrollment eligibility rules are some of the most important decisions you will make about your 401(k) plan. Understanding your options will help you make the right decisions to control your administration costs and create a valuable benefit for your employees. Feel free to contact us for more information.