Eligibility Question

[Guest Spock]

A large company sponsors a 401(k) deferral only plan. In order to be eligible to participate, a person needs to be "scheduled" to work 1000 hours. Participation is immediate as long as the employee's work schedule is for 1000 or more hours.

If someone is a participant in the plan and making deferrals, and her schedule changes so that her scheduled hours are less than 1000 hours, her deferral election is turned off by the employer because she is no longer considered eligible due to the reduction in scheduled hours.

I'm a DB guy and its been a few years since I've worked in the 401(k) arena, but that does not sound legitimate to me. Since it is a deferral only plan, I thought the rule of thumb was "once in always in".

I'm interested in hearing comments from people who are closer to 401(k) eligibility issues than myself. I citation would be extraordinary. Thx.

[zimbo]

This is not legitimate. There is no 1000 hour accrual requirement for making deferrals in a K plan, once an employee becomes a participant. In other words, once the initial eligiblity requirement is met, the participant remains in the K plan eligible to make deferrals as long as employed no matter whether their hours of service are reduced.

[BG5150]

Does the plan define a class of employee that is not eligible to participate in the plan at all? Eg "managers," "employees in the Des Moines office," or "those scheduled to work less than 1000 hrs."

"Once in, always in," is true to an extent. But when an employee becomes a member of an excluded class defined in the document, the person is no longer covered by the plan.

[Guest Spock]

Does the plan define a class of employee that is not eligible to participate in the plan at all? Eg "managers," "employees in the Des Moines office," or "those scheduled to work less than 1000 hrs."

"Once in, always in," is true to an extent. But when an employee becomes a member of an excluded class defined in the document, the person is no longer covered by the plan.

There is no classification of eligible employee other than "scheduled hours", so I think "Once in, always in" applies.

[FormsRstillmylife]

If the employee is not credited with 1,000 hours in the initial year, the employee does not satisfy the 1,000 eligibility requirement. Deferrals should be returned to the employee as an improper participant. Otherwise, the 1,000 requirement is a smokescreen to exclude part-time employees.

[Kevin C]

Here is some guidance on part-time employees.

http://www.irs.gov/pub/irs-tege/qab_021406.pdf

It is possible to have different eligibility requirements for full-time and part-time employees. Our EGTRRA VS documents have an option that provides immediate eligibility for full-time and eligibility after completion of a year of service for part-time.