401(k) plan options for eligibility requirements

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

During the 401(k) plan design process, there are lots of things to consider. One of them is the eligibility requirements to participate in the plan. Who is allowed to participate in the plan? This can have a dramatic effect on the plan’s cost, ease of administration and perceived value to prospective employees. The eligibility requirements should be aligned with the company’s 401(k) plan goals.

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Some businesses allow new employees to participate in the 401(k) plan immediately and some require employees meet a minimum age and certain service conditions before they can participate. According to the IRS, the standard for a required age is 21 and the standard for a service requirement is one year of service. In addition, if the plan includes an employer contribution, the standard service requirement to receive an employer contribution is two years of service. Another variation of service requirement could involve the employee to work a certain number of hours throughout the year to become eligible to participate.

As employers, not restricting plan participation eligibility is a great way to attract and retain quality employees. Stating that new employees can join the plan immediately, could be a strong selling point to entice top talent. In contrast, if employee turnover rate is high, imposing age and service restrictions could be the best option to avoid costs. If the plan has a service requirement that an employee must work 1,000 hours within a certain period, this will allow the employer to eliminate fees for enrolling employees that are only around for a short period from plan participation.

There is no such thing as a “one-size-fits-all” for setting eligibility requirements for a 401(k) plan. Some of the most consequential decisions made when designing the plan relates to employee eligibility. If the plan’s eligibility is too receptive, plan expenses can increase exponentially, and administration can become unnecessarily complex. However, if the plan’s eligibility is too strict, prospective employees might look elsewhere for employment.

Do you still have any questions? Please don’t hesitate to contact a Henry+Horne professional to assist you.

Spencer Saing