It’s obvious that all employees who elected to participate in your 401(k) plan would be an eligible participant. What you may not know is that employees that are no longer employed by your company, yet still have an account balance in the 401(k) plan, are also included. You are also required by ERISA to count any employees that meet the participant eligibility requirements but elected not to participate in the plan.
Do you include part-time or seasonal employees as eligible participants? During our plan audits, it’s common to see employees that are not full-time, regular employees, excluded from consideration for participation in their company 401(k) plan. This may be appropriate if the plan document excludes them specifically. However, often the plan document does not specify. It may not require any age or service requirement to enter the plan. Sometimes, the only requirement for entry is that the employee be of a certain age. In these cases, almost all employees will be eligible to participate.
A new wrinkle to this conundrum was caused by the SECURE Act (Setting Every Community Up for Retirement) which was signed into law on December 20, 2019. This law changed the rules regarding to eligibility. Prior to this law, employers would be eligible based upon your Adoption Agreement or plan document. However, you were eligible to exclude from participation employees that had not reached the age of 21 and/or completed one year of service with a minimum of 1,000 hours; this will change with introduction of the SECURE Act.
Going forward, long term part-time employees may commence participation by the first day of the first plan year after they have attained the age of 21 with 500 hours of service over three consecutive 12 month periods, or, six months after the eligibility requirements are satisfied. Although employers will not have employees in 2020 or 2021 that will have the three years of service to meet this requirement, the tracking of data must begin immediately to ensure the employer can identify the employees in future years that reach this threshold. We believe this will require unique tracking outside of your payroll or Human Resource systems.
All employers are encouraged to review their plan documents to ensure they are offering participation to the right employees. Exclusions need to be based in the description provided by the plan document. If your plan document does not describe the eligibility requirements the same as the way that you are administering the plan, you will either need to amend the document to accurately describe your intentions toward eligibility or you should amend your practices to be in-line with the plan document.
Retirement plans can be very complex. As an innovative firm, Summit CPA specializes in 401(k) audits. We have the ability to offer assistance entirely off-site with little or no distraction to your daily office routine. We also offer flat-fee pricing so there are no surprises on your bill when the job is complete. For assistance contact our office at (866) 497-9761 to schedule an appointment.