401(k) Plan participation eligibility requirements take on greater significance for Plan sponsors in a tight labor market. Generally speaking, employers can require a new employee to wait a full year before being eligible to participate in a qualified retirement plan, such as a 401(k) Plan – in addition to requiring that the employee reach 21 years of age before participating.

Debating the Costs of Immediate Enrollment

Employers may debate whether it is worth the trouble – and costs – of allowing new employees the opportunity to immediately enroll in their 401(k) Plan. If there is a chance the new hire will hop to another job sooner than the plan is legally required to let them join, why bother to jump through administrative hoops and incur financial costs?

Additionally, it is not unusual to have to terminate an employee who does not turn out to be a right fit for your organization. Employers could wind up having to pay for the administration of a very small retirement plan account before ultimately terminating the new hire in their first year of employment.

Related Read: “Failing to Enroll Eligible Employees in Your Plan“ 

Differing Opinions Based on Plan Size

However, data from the Plan Sponsor Council of America’s (PSCA) 61st Annual Survey of Profit Sharing and 401(k) Plans indicates that 52% of plans with less than 50 participants impose a service requirement (typically one year) for new hires. On the other hand, only 23% of plans with at least 5,000 participants impose such restrictions.

Along similar lines, setting a minimum age for plan participation is also more common among smaller plans. For example, 77% of the below-50 participant plans in the PSCA survey have age restrictions, versus 49% of the large plans.

For plans that set a minimum age requirement, 21 years of age is the most common. However, if the plan only has an annual entry date, an employee who turns 21 years of age late in the calendar year may wind up not joining the plan until they are almost 22 years old.

How to Compute Service Requirements

In addition to setting age and service requirements for plan eligibility, plan sponsors can choose two ways to count employee service for participation eligibility purposes:

1. Elapsed Time
   This is simpler and more common; the countdown begins on the employee’s date of employment.
2. Counting Hours
   This method involves counting hours worked during an “eligibility computation period” that cannot exceed 12 months and cannot require more than 1,000 hours of service. This method tends to eliminate part-time employees from plan participation.

As employers fight to attract – and retain – top quality employees, not restricting plan participation eligibility is a great start. If an employer promotes their 401(k) Plan in recruitment efforts, stating that new hires can join the plan immediately, it could be a strong selling point. Additionally, the sooner an employer is thinking about employees’ retirement readiness – the sooner they are in a 401(k) Plan and saving – the better shape they will be in down the road.

In contrast, if employee turnover rate is high, imposing age and service restrictions could be the best option.

What Is the Right Call?

Only a careful analysis of your demographics and available plan choices with your benefits advisor will give you the level of assurance you will need to change your current plan’s eligibility requirements. 

If you have any questions, please contact Ken Kobiernicki or your ORBA advisor at 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.