Increasing eligibility requirements

[Guest Marshall Franklin]

If a Plan changes its eligibility requirement from one year of service to two years of service (for an employer discretionary contribution that is 100% vested) can this apply to current employees who have not yet become participants (especially the ones who have completed a year of service and are just waiting to enter the Plan)? Also, could it apply prospectively to "unenroll" participants who do not yet have two years of service?

[Guest MTransue]

The employees who are waiting to enter the plan could not be withheld from entering the plan. They have accrued benefits already, even though they have not officially entered the plan. A plan cannot be amended to reduced accrued benefits. Section 411(d)(6)/ERISA 204(g). However, an amendment may reduce the rate which participants will accrue benefits in the future. (Anti-cutback rule).

The effective date of your amendment to your plan will affect your future hired employees, but anyone hired before the amendment would be subject to the more generous eligibility requirements.

[Guest JAREL]

I don't think there is a 411(d)(6) problem here. You have to become a participant before you accrue a benefit. Also, the contribution is discretionary. I think, though, that the employees who have a year of service already may need to come into the plan at the next entry date. Anyone who doesn't have a year of service yet could easily be required to have two (I know you would not have to grandfather all employees). You could, however, set up a new plan with a two-year eligibility, make no discretionary contribution to the old plan for the year, amend the old plan, and merge them next year. This might be too cumbersome, but it should work.

[AndyH]

I have two comments on this. First, you can't have a 2 year wait for deferrals, so if that's what you're after it's a no go.

Second, you could have discriminination issues based upon the timing of the amendment, or other "facts and circumstances" under the benefits, rights, and features rules.

So, proceed very cautiously if you really want to do this.

[Guest Hans Moleman]

I disagree with some of the prior posts.

If so desired, the amendment could require current participants and any other employee to satisfy the new eligibility requirements. Those who had entered the plan and may perhaps have a balance would be precluded from receiving further contributions without satisfying the new eligibility requirements.