Amending eligibility to a longer wait in a 401(k) Plan

[Guest TracyAndrews]

A plan has eligibility requirements of 6 months and Age 21. With 6 month eligibility, there is no provision for hours so even part-timers get into the Plan. This was not the intent of the employer. The liberal eligibility period has pushed the number of plan participants up over 100, even though only about 25 participate. An independent auditor's opinion is now required, which really has increased the Plan's admin costs. We just walked into this situation and we are trying to alleviate the concerns of the client. What would be the soonest that the plan could be amended to increase the eligibility to one year? We realize the existing participants would still be counted, but it would stop other part timers from getting in to the Plan. Are there anti-cutback rules to consider? What would have been the latest the plan would have needed to be amended for this eligibility to change in 2004?

Any help is greatly appreciated.

[Tom Poje]

what type of entry dates does the plan have?

[Guest TracyAndrews]

The Plan currently has quarterly entry, with 128 participants in the beginning of the year, and 153 at the end, with a dismal 27 participants with account balances! The outside auditor (the only one we could find to take this on) is quoting a fee of about $10,000 for this work (per year). All the monies are nicely accounted for in a tidy annuity contract, so the fee has the client in a bit of a frenzy. This problem actually goes back to 2002, where a 5500 with sched I was filed incorrectly, since a Sched H should have been done. Therefore the client is looking at AT LEAST 2 years of audit requirements. Any recommendations would be much appreciated!

[Archimage]

From the information gathered, it sounds like you are stuck with an audit.

[Brian Gallagher]

On our document, you could amend the plan to specifically exclude people who are not regularly scheduled to work X hours a year. For example, I have a client that says that an excludable class is: anyone who is not scheduled to work at least 1000 hours.

There is also a section on our adoption agreement allows to have a months and and hours restriction for eligibility. For example: 6 months service, 1000 hrs (max).

Of course, that would only affect future people, but at least it'll stem the tide.

[Brian Gallagher]

And $10,000 for an audit? Isn't that a bit excessive? I don't know much about aduitor's fees, but I thought they were around $3-$5,000.

And who is the Trustee of the plan? If it's a bank or insurance company, you can get away with a limited scope audit.

[R. Butler]

On our document, you could amend the plan to specifically exclude people who are not regularly scheduled to work X hours a year. For example, I have a client that says that an excludable class is: anyone who is not scheduled to work at least 1000 hours.

There is also a section on our adoption agreement allows to have a months and and hours restriction for eligibility. For example: 6 months service, 1000 hrs (max).

Of course, that would only affect future people, but at least it'll stem the tide.

1. The document specifically excludes employees who are not scheduled to work 1,000 hours? Unless you're document requires a year of service, do you think that requirement is permissable? What happens if they actually work 1,000 hours?

2. Remember you can require 1,000 hours in 6 months, but if they don't meet that, but work 1,000 hours in 12 months, don't you still have to let them in?

3. Why couldn't employer apply new eligibility requirements to existing participants? As long as they aren't taking away accrued benefits, I don't see an anti-cutback issue. (Granted, from a PR standpoint, maybe not wise)

[Guest TracyAndrews]

See that's my issue, I thought you couldn't have an hours requirement if under 1 year of service, or at least that's what I've assumed the last 15 years...am I wrong?

Our document will let us exclude people initially (as in the effective date of the Plan) who are not scheduled over 83.33 hrs per month, but not ongoing. Once the six months of service kicks in, I don't think there's any way to keep them out.

For all those people who did not have 6 months of service by Jan 1, could we go back and change to 1 year of service requirement before the next Apr 1 entry date hits?

And yes I agree, the 10,000 fee sounds crazy, but that was the quote from at least 2 auditors. Their own CPA is a Big 4 firm and they wanted over 20,000. So we'd be open to suggestions there too!

Thanks.

[WDIK]

See that's my issue, I thought you couldn't have an hours requirement if under 1 year of service, or at least that's what I've assumed the last 15 years...am I wrong?

You are not wrong, older prototypes contain the language you describe. Newer prototypes add the hours requirements.

[Guest TracyAndrews]

I still need an answer : What is the latest we can amend the Plan in 2004 to change the eligiblity? Can it be retroactive in the 401(k) if none of the new entrants have chosen to defer?

[Blinky the 3-eyed Fish]

You already got the answer, but I will say it again in a different way. You can only apply the more restrictive eligibility requirements prospectively (i.e. to those that have not yet entered the plan). You cannot go back and take away participation from those that entered previously even if they did not defer.

[Tom Poje]

regarding issue of hours requirement if less than 1000 hours:

ERISA Outline Book uses the following as a possible language (well ok I modified it a little bit)

To become participant you must be age 21 and complete one of the folowing:

1. 3 calendar months in which 100 hours credited each month

2. year of service, where year of service = 1000 hours in a 12 month period.

so it does appear possible to have an hours requirement if under 1 year of service, as long as you also have 1 year of service eligibility as well.

..............

I don't believe you can retroactively amend to exclude ees once they have complete their 6 months and met the entry as specified in the document.

However, you could amend plan to require a participant must have satisfied a 1 year of service condition. That won't help for plan year begining 1/1/04 but should solve problem going forward. see 2.64 of ERISA Outline Book - 2003 edition

[R. Butler]

You already got the answer, but I will say it again in a different way. You can only apply the more restrictive eligibility requirements prospectively (i.e. to those that have not yet entered the plan). You cannot go back and take away participation from those that entered previously even if they did not defer.

You cannot take away the prior participation, but if you amend the eligbility requirements and do not add a grandfather clause, can't you effectively exclude them from future participation? It doesn't solve the audit problem this year, but it may solve problems in future years.

[Blinky the 3-eyed Fish]

Ah yes, I see where I was less than clear. I agree with the Butler.