Eligibility Rules

[MBCarey]

Is there any new rule in a 401(k) plan that says you have to have immediate eligibility for deferrals even if the wait for match is one year? I don't think so, but I am starting to doubt my knowledge.

[Guest Boilerburm]

There is nothing out there that says you need to have immediate eligibility for 401(k) deferrals. You can still require a year of service and dual entry dates that may keep an employee out of the plan for up to 18 months from date of hire.

[MBCarey]

I was recently in a corbel seminar and a section of the materials that we were given has a questions and answer and one was on Eligibility which says:

Max of one year eligibility. A 401(k) plan may not require the employee to complete more than one year of service (as determined by Code 401(a)(1) but without retard to the two year rule of Code 410(a)(l)(B)(i) to participate in a 401(k) arrangement.

I have a couple plans with an 18 month eligibility. Or entry based on the first six months entering on the beginning of the current year in which requirements were met or if met in the last 6 months enterning on the ist day of the following plan year.

Does the statement above mean that I will have to let allow participants who complete a year of service to begin making deferrals immediately.

[Tom Poje]

technically, there is no problem with the eligibility (retroactive entry if hired in first 6 months) as you described, but it does lead to some obvious problems.

lets take a look at an example:

calendar year plan

ee hired 3/1/2001

so in 1 year it is 3/1/2002, ee now has retrocative entry date to 1/1/2002.

you suggested letting him defer from 1/1/2002.

but what if he had quit on 2/1/2002? then you have let him defer when he wasn't eligible. can't do that, can you?

on the other hand, if you didn't let him defer, now he has 2 months of money he couldn't defer on, and you can't retroactively defer. generally, for testing purposes you have to use comp from entry date, which would result in a lower ADP %.

can't win can you?

I don't recomend retro entry dates when a deferral feature is involved.

[MBCarey]

Tom, I hadn't really considered the scenario you gave. But I do see you point.

Can you explain to me the Max. one year to participant in 401(k) plan. The way I read it is that I can only make an employee wait one year to be eligible to make deferrals, but can set up eligibility so that the would have to wait 18 months or 2 years to receive a match.

Is this true.

Marybeth

[Tom Poje]

the rule is as follows:

the longest exclusion you can have for anyone is one year.

(In the case of profit sharing it can be two years, but then you have to 100% vest)

anyway, once an ee has completed 12 months, you have to bring him in either

1. first day of plan year or

2. 6 months after meeting the 12 month wait.

most plans accomplish this by having 2 entry dates, 1/1 and 7/1 in the case of calendar year.

In your example, the plan has only one entry date 1/1.

but it gets around the problem by saying those hired in the first half of the year enter retroactively, and those hired 2nd half enter following.

Technically, you could have eligibility first day of plan year or 6 months after meeting eligibility of 1 year. wouldn't that be fun. 183 entry dates!!!!!!

Awhile ago I read something that the original intention would have been max exclusion using 2 entry dates, rather than 18 months...in other words not 6 months after meeting the 12 month wait, but 6 months after the first day of the plan year.

...........

What is even more fun is if your plan has a one year break in svc rule and someone gets rehired. technically, the regs say you have to retroactively let the person in after he works one year. that is next to impossible in a 401(k). example: ee gets rehired 5/1/2001. he completes 1 year on 5/1/2002. now you have to retroactively let him in back to 2001!!!!! Oh boy. your ADP test for 2001 is shot. if you made a profit sharing contribution you may have to redo that as well!!!!.

[MBCarey]

Thanks....

However, I think I will not even think about, let alone pass along your last funny or 183 entry dates.

Have a good weekend. Marybeth