Can We Change our 401(k) Plan Eligibility Requirements to Exclude Employees Who Have Already Joined?

DWC | 10/9/18

QOTW - 10.9.2018 - Can We Change our Plan Eligibility Requirements to Exclude Employees Who Have Already Joined - Plan Design

Facts

Our company has quite a few employees who only work a few hours each week.  When we setup the 401(k) plan, we wanted to allow all our employees to save, so we set the eligibility requirement at the first day of the month following an employee’s hire date.  Unfortunately, hardly any of our part-timers are contributing, and it has become burdensome and expensive to keep up with all the notices we have to provide each year to people who don’t even have accounts in the plan.

Question

Is there some way we can change our plan’s provisions so that these individuals are no longer eligible or is it a once eligible/always eligible type of situation?

Answer

We actually get this question more often than you might think.  Most people who ask it assume the answers will be that they are stuck with all the non-contributing, part-timers who are already eligible.

We’ve got good news for you.  It is completely possible to amend your plan’s eligibility requirements to make them more restrictive up to the maximum waiting period of attainment of age 21 and completion of 1 year of service (12 months of service with at least 1,000 hours worked) with semi-annual plan entry dates.  Everyone who has not satisfied the newly amended requirements is kicked out of the plan.

There are several caveats to keep in mind (aren’t there always…).

  • You cannot disregard service prior to the effective date of the change. That means when you are determining who stays in and who gets kicked out, you must measure service from each person’s original date of hire.
  • If your plan is a safe harbor 401(k) plan, the change to eligibility cannot be effective until the first day of the next plan year.
  • Any of your part-timers who contributed to the plan before the change must still receive most of the notices even though they are no longer eligible to make contributions.
  • Getting kicked out of the plan via a change to the eligibility requirements does not trigger the right to take a distribution. That means any employees with balances who are subsequently amended out of the plan must leave their money in place until there is some other event that permits distribution, such as termination of employment.
  • It only takes an average of 20 hours worked per week to hit 1,000 hours for the year. Since the maximum wait is based on actual hours worked rather than expected or normally scheduled hours, it is critical to watch those on the cusp to make sure they are not inadvertently kept out of the plan too long.

There you have it.  As retirement plan questions go, this one has a relatively straight-forward answer. For more information on plan eligibility, please visit our Knowledge Center here, here, and here.

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Topics: Question of the Week, Plan Eligibility, Excluded Employees, Retirement Plan Design, Part-Time Employees

The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.