401(k) eligibility playbook: An employer’s guide to rules, requirements, and tracking
Quick takeaways
- 401(k) eligibility requirements tell you who can participate in your company’s 401(k) plan and when they can join.
- The IRS sets eligibility requirements that include a minimum age of 21 and a minimum length of service of one year. But as an employer, you can typically set more lenient requirements.
- Selecting eligibility requirements is important because they can have a big impact on your plan design and administration. The more complicated the requirements, the more time you may have to spend on administration.
As an employer, you are likely aware that 401(k) plans are often a cornerstone of an employee’s benefits package. At a high level, a 401(k) is a qualified retirement savings plan offered by an employer. It allows employees to defer some of their compensation from their paychecks directly into a retirement account. It can also allow you as an employer to contribute funds to help employees save even more. With traditional 401(k) plans (as opposed to Roth 401(k) plans), contributions are made pre-tax and investment growth is generally tax-deferred.
In this article, we’ll dive into some of the more technical details of offering a 401(k) plan: eligibility rules, requirements, and tracking.
Understanding 401(k) plans and eligibility
401(k) plans can be a great way to save for retirement, but the IRS does have important rules that you as an employer must follow in order to offer this to your employees. Eligibility requirements are part of these important rules. It is essential that you understand eligibility requirements, because they tell you who can participate in your 401(k) plan, when they can participate, and other key information to help you stay compliant.
At a high level, the IRS sets forth eligibility rules that you must follow. You can’t make eligibility requirements that are more strict than the IRS, but you can be more lenient. Some common categories for requirements include age, length of service, and type of employee.
Breaking down 401(k) eligibility requirements
401(k) maximum eligibility requirements from the IRS include:
- Age requirement: Be at least 21 years old
- Service requirement: Have at least one year of service (two years for profit sharing or matching contributions)
What do those mean exactly? The age requirement is pretty self-explanatory, but the service requirement has some details to get into.
In the past, all employees could be subject to a one year of service required with at least 1,000 hours of service. However, the SECURE Act will change this in 2025 so that there is a lower requirement that will apply to part-time employees who have worked at least 500 hours a year for the previous two years. So it is important to take that into consideration when determining eligibility based on service.
Employee role and classification is also an important part of eligibility. There are some classes of employee that are often excluded from 401(k) eligibility, including:
- Union employees
- Non-resident aliens
- Independent contractors
- Leased employees
While the plan can generally exclude any class of employees, there are two things to keep in mind. The first is that you cannot exclude part-time or seasonal employees as a class under IRS regulations. Additionally, while you can exclude certain classes without requiring additional testing, most often you will need to complete additional non-discrimination testing if you have excluded anyone.
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401(k) eligibility examples
Listing out those eligibility rules is all well and good, but what about real world scenarios?
Here is a breakdown of some common scenarios of employees that would be eligible for a 401(k) plan assuming the max requirement of age 21 and one year of service with 1,000 hours:
- Your employee works full-time, is not a union employee, and is 40 years old.
- Your employee works 20 hours a week, is not a leased employee, and is 21 years old.
Here is a breakdown of some common scenarios that would exclude employees from 401(k) eligibility under IRS rules:
- Your newly hired employee works full-time and just turned 20 years old. [They do not meet the age requirement.]
- Your employee works part-time, 10 hours every other week and is 32 years old. [They do not meet the service requirement.]
Want to be more lenient with the eligibility requirements for your plan? You can — you just can’t be more strict. For example, you could make the minimum age 18 years old. But you can’t make the minimum age 25 years old. You could make the minimum service requirement three months, but you can’t make the minimum service requirement three years.
Communicating with your employees about 401(k) eligibility
Just like other aspects of your business, clear and accurate communication with your employees is an important part of offering a 401(k) plan. When it comes to eligibility, employees need to know the basics, like the requirements to become eligible and when they will become eligible. They also need to know some deeper details on certain issues, like how your plan handles exceptions and unusual cases, like quitting and getting rehired.
Make sure that you have a consistent way to provide employees with written information they will read and can reference at any time. This may take the form of an online portal, paper notices provided in-person, or something else.
Another tip? Stay on top of important dates that may trigger sending information to an employee. Here are some key dates and their definitions:
- Eligibility date = The date that your employee has satisfied the requirements to participate in the plan.
- Entry date = The date that your employee actually enrolls in the plan. This will likely be different from the eligibility date, as most plan administrators set forth certain dates that employees can enroll.
List of employee notices
As you can probably guess, managing and administering a 401(k) plan can come with a lot of paperwork. An important part of that paperwork is required notices. These are some of the notices that you as an employer may have to send to your employees about your 401(k) plan.
| Notice | Timing |
|---|---|
| Safe Harbor notice | Within a “reasonable time” before employee eligibility (the IRS defines this as no more than 90 days and no less than 30 days) |
| QDIA notice | At least 30 days before plan eligibility or at least 30 days before the first defaulted contribution into the plan’s QDIA |
| ACA, EACA, QACA notices | Within a “reasonable time” before the participant’s first contribution |
| 404(a) Participant Disclosure notice | Within a “reasonable time” before the participant’s first contribution |
| Summary Plan Description (SPD) | Within 90 days of plan entry (for participants) or within 90 days of receipt of benefits (for beneficiaries) |
Navigating changes and updates to 401(k) eligibility rules
It always pays off to stay up-to-date with new rules, regulations, and laws that the government releases about 401(k) plans. One of the most recent updates that has changed 401(k) eligibility rules is the SECURE Act of 2019 and SECURE 2.0 in 2022.
The SECURE Act is the legislation that sets different maximum eligibility for long-term part-time employees to participate in 401(k) plans by introducing the rule mentioned above. Basically, starting in 2025 employees who have worked 500 hours or more per year for two consecutive years must be allowed to participate unless they are in an excluded class.
Familiarizing yourself with 401(k) eligibility requirements is important, especially as you set out to determine the eligibility rules that will work best for your company. If you're looking for a way to easily manage 401(k) eligibility, a partner like Guideline can help. We help employers like you with their 401(k) management so that you can focus on what matters — your business.
Give your employees a roadmap to retirement
With Guideline, you can provide an impactful work benefit while minimizing paper work and fees