Increase 401(k) Eligibility

[Nate X]

We are amending a plan to increase the eligibility from 3 months to a year of service.

For employees who never completed a year of service but were previously eligible, they will only be allowed to continue as a participant if they have a balance in the plan on the amendment effective date.

Our document does not restrict us from kicking participants out of the plan due to a plan amendment.

Does anyone see an issue with amending the plan to only grandfather those with a balance?

[Larry Starr]

2 hours ago, Nate X said:

We are amending a plan to increase the eligibility from 3 months to a year of service.

For employees who never completed a year of service but were previously eligible, they will only be allowed to continue as a participant if they have a balance in the plan on the amendment effective date.

Our document does not restrict us from kicking participants out of the plan due to a plan amendment.

Does anyone see an issue with amending the plan to only grandfather those with a balance?

This is a response without doing the research, so from memory and experience.  It could be incorrect, but I believe it to be correct.

I do not believe you can EVER throw someone out of the plan who has met the eligibility requirements applicable to them at the time just because you change them later. That would include someone who is in the plan but has no account balance for whatever reason.  You can change eligibility to exclude certain classes of employees, but I'm not sure you can define the class as those who  don't meet the new eligibility requirements AND have a zero balance in the plan.  Being the end of December and still working under the "old rule" that the plan has to be adopted by year end, probably won't have time to do the more in depth research needed to confirm my memory/opinion.  Would look forward hearing from others on this, especially with specific references if you can.

[chc93]

Prior discussion on changing eligibility from immediate to 1 year..

See RatherBeGolfing replies... It is allowed to "un-participate" a previously eligible participant.

From the linked thread... reply by RatherBeGolfing...

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There was absolutely a clear answer at Annual but some in the audience did not want to accept the answer.

The answer is that if you have immediate eligibility and later change that eligibility to something else, those who have not met the new eligibility are now not eligible to participate. There are no cutback issues here (which is what Brian was saying in his session and Sal confirmed during the general session the next day).

But wait there is more...  If you want the people who are in the plan to stay in, simply make your amendment prospective and you won't have any issues.

As for discrimination issues, you should be fine changing the eligibility within the statutory limits.

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[Nate X]

Circling back to my original question: Does anyone see an issue with amending the plan to only grandfather those with a balance?

[chc93]

1 hour ago, Nate X said:

Circling back to my original question: Does anyone see an issue with amending the plan to only grandfather those with a balance?

My thoughts are that you either leave all eligible participants in, or "remove" all eligible participants who did not meet the new eligibility... whether the have a balance or not.  But, maybe hopefully those with a balance will eventually meet the new eligibility and therefore can then continue participation at that time... but there may be a gap between the amendment and the new eligibility.  (my <2 cents on this).

[RatherBeGolfing]

2 hours ago, Larry Starr said:

This is a response without doing the research, so from memory and experience.  It could be incorrect, but I believe it to be correct.

I do not believe you can EVER throw someone out of the plan who has met the eligibility requirements applicable to them at the time just because you change them later. That would include someone who is in the plan but has no account balance for whatever reason.  You can change eligibility to exclude certain classes of employees, but I'm not sure you can define the class as those who  don't meet the new eligibility requirements AND have a zero balance in the plan.  Being the end of December and still working under the "old rule" that the plan has to be adopted by year end, probably won't have time to do the more in depth research needed to confirm my memory/opinion.  Would look forward hearing from others on this, especially with specific references if you can.

From a cutback perspective, there is no protected right to continued participation, only to benefits already accrued.  So if you have eligibility that less than the statutory maximum, an amendment could make a current participant ineligible for continued participation until new eligibility is met.  Some documents default to grandfathering current participants, others it would depend on the amendment.

You would still have to make sure that the amendment itself isn't discriminatory.  

EOB (Ch 2, Section VI, Part E)

Quote

Part E., Eliminating an employee's active participant status by changing the plan's eligibility requirements

Just because an employee qualifies as a participant in the plan does not guarantee the employee the right to participate in the plan for the rest of his employment with the employer. In Chapter 3B, Section X, we discuss issues relating to the protection of accrued benefits, including the prohibition against reducing an employee's accrued benefit by plan amendment (known as the anti-cutback rule). The anti-cutback rule under IRC §411(d)(6) only protects the employee's benefits that are already accrued. It does not guarantee the right to accrue additional benefits in the future. In Chapter 6, Section III, Part D, we discuss the requirement to protect optional forms of benefit in the plan. Again, this protection guarantees that the employee's payment options regarding accrued benefits are protected. The right to continue to participate in a plan is not a protected benefit. Accordingly, an employee's status as an active participant in the plan can be eliminated by modifying the eligibility requirements in a way that the employee is no longer satisfying the requirements for participation. When active participant status is eliminated, the participant's accrued benefit is protected (see 3. below), but the employee will not accrue additional benefits until he or she first re-establishes the right to participate in the plan under the modified eligibility requirements.

 

 

[C. B. Zeller]

14 hours ago, Nate X said:

Circling back to my original question: Does anyone see an issue with amending the plan to only grandfather those with a balance?

I think this would violate the contingent benefit rule of 1.401(k)-1(e)(6)(i) - you would be conditioning the right to make future deferrals on having made deferrals in the past.

[Larry Starr]

18 hours ago, RatherBeGolfing said:

From a cutback perspective, there is no protected right to continued participation, only to benefits already accrued.  So if you have eligibility that less than the statutory maximum, an amendment could make a current participant ineligible for continued participation until new eligibility is met.  Some documents default to grandfathering current participants, others it would depend on the amendment.

You would still have to make sure that the amendment itself isn't discriminatory.  

EOB (Ch 2, Section VI, Part E)

 

 

Right on point; thanks.

[Gilmore]

A check of the plan doc should be done as well. Our doc says that any employee that was a participant before an amendment changing eligibility remains a participant after the amendment. 

[Scott50]

You may be better off amending the plan eligibility to employees hired after a prospective date.  That way you don’t have employees chasing eligibility.