401(k) Eligibility Statutory Requirements


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Excludable Employees

A plan may statutorily exclude from participation employees who have not attained age 21 and/or completed a “year of service” (generally defined as 1,000 hours service during a 12- month period, but see below discussion on “Employees Other Than Full-Time”).

A plan also may exclude employees who are covered by a collective bargaining agreement that does not provide for participation in the plan, if the retirement benefits were the subject of good faith bargaining.

Other examples of excludable employees include illegal aliens, employees of “qualified separate lines of business,” and certain terminating employees.

Employees excluded under any of the above categories may be treated as “excludable” for nondiscrimination testing purposes.

Although certain categories of employees may be excluded from participating in the plan (within legal limits) (for example, temporary employees), those excluded employees must sometimes be counted for nondiscrimination testing purposes. Since they will not “benefit” under the plan, they could cause the plan to fail the coverage testing for the plan. See the compliance task on coverage testing.

Employees Other Than Full-Time

Prior to the SECURE Act, plans could generally exclude part-time workers who work fewer than 1,000 hours in a 12-month period. However, effective for taxable years beginning after January 1, 2020, most plans must include a dual eligibility provision, under which an eligible employee (i.e., an employee who does not meet one of the exceptions under “Excludable Employees,” above) must be permitted to participate upon completion of either:

Employees who are eligible to participate solely by reason of the above provision are permitted to be excluded from testing under the nondiscrimination and minimum coverage rules, and from application of the top-heavy requirements, which include, among other things, certain mandatory contributions on behalf of non-key employees, regardless of whether they make elective deferrals to the plan.

NOTE: On and after January 1, 2025, the SECURE 2.0 Act will reduce the three years of service requirement, above, to two consecutive years in which the employee completes more than 500 hours or service in each 12-month period. Being that this change will become effective on and after January 1, 2025, the provision will apply to eligible employees having the required two 12-month periods of 500 hours of service on and after January 1, 2027.

It is also important to consider how the terms of the plan affect the participation of employees working under special situations, such as rehired participants, employees working on a part-time or temporary basis, seasonal employees, leased employees, and contract employees. Strict adherence to the terms of the plan in this regard is essential in order to avoid potential adverse consequences, including the need for correction under EPCRS.

If there is any question regarding how these types of employment situations should be handled for purposes of plan participation, the plan sponsor should always obtain legal advice or other professional assistance in working through the appropriate treatment of these individuals under the law and the terms of the plan.
Here again, it is important to develop internal control procedures to confirm that all eligible employees are timely included in the plan (and to ensure that ineligible employees are not inadvertently included).