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I have always wondered if this could be seen as a fiduciary issue. Is the choice of plan document a sponsor decision alone as it could have been done before the plan even existed? The closest example I can think of is back in the '90s you heard of banks requiring companies to move their 401(k) assets to the bank's trust department as a condition for a loan. The objection was the transfer wasn't done for the exclusive benefit of the participants. In this case the choice of where to put the assets could be seen as being done in part to save the sponsor money on a document and not to benefit the participants. I am more spit balling then making a strong case as fiduciary issues aren't my strongest subject but I have come to believe that of all the issues in retirement plans this is often times one of the most ignored.

Without reviewing any documents, I would say that this is ok. As long as the employer has a written policy outlining the time period, has communicated it to the employees, and has followed it, there should be no discrimination issue. The discrimination issue would arise if the employer did not follow it for all, for example, if with a new hire the employer allowed that person to come on quicker.

I agree with this. And other comments for that matter; it depends on how things are structured. But also depends on who is providing the answer. Had a client receiving severance pay and they wouldn't let her take her money out of the plan because they said she was still employed, so we said "OK then she wants to make 401(k) contributions." Then they said she couldn't because...she wasn't employed. It took a couple of years for them to grasp the absurdity of it all and they released it.

Interesting. Thanks for posting that response. I neither disagree nor agree, since I wasn't sure in the first place! But as an observation, it sure sounds like a last day requirement to me, whether explicitly stated as such or not. Under the interpretation above, you don't get 12 months unless you are employed on the last day. My gut feeling is that something seems amiss with that. Fortunately, it isn't anything I have to worry about, and for that, I'm very happy!

The ER might consider that the EE could claim he is an active employee due to the ER's treatment of "severance" payments, and might also demand coverage under other benefits provided to active employees.

^to add to the above though if she rolls it to an IRA and then needs to withdrawal money before age 59.5 it would not qualify for the exemption from the 10% penalty in most cases.

FWIW, I submitted this question for the "Ask the Experts" session at the ASPPA Annual Conference last week. I was surprised when it was the first question addressed. Sal said they are eligible for the TH minimum using full year 415(c ) compensation. I didn't completely follow his brief explanation, but he was clear that he thought a non-key participant who was eligible to defer for part of the plan year and who is employed on the last day of the year should receive the TH minimum. He asked the panel if they agreed and they did. Another panelist pointed out that the regulations do not say you must be a participant on the last day of the year.