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Determine Plan Eligibility

Determine Plan Eligibility

One area that can get neglected in the administration of a retirement plan is tracking employee eligibility for the company’s retirement plan, per the plan documents. The plan could have different rules for different provisions of the plan – employee contributions, employer contributions and possibly profit sharing contributions. Tracking eligibility in an on-going and timely manner can be very time-consuming.

Failure to timely include all eligible employees in a qualified plan can cause the plan to lose its tax-qualified status.

Plus, once you figure in that defined contribution plans require employees to decide if they would like to participate in the plan, eligibility tracking for employer contributions becomes even more complex. In the view of the IRS, a plan’s failure to permit an otherwise eligible employee from participating in the plan causes that employee to lose the opportunity to make elective deferrals, receive earning related to such deferrals, and receive employer contributions (and related earnings) during the period of exclusion.

The Plan Sponsor must have a system to ensure that employees are allowed entry into the plan according to the terms of the written plan.

Steps to Properly Tracking Eligibility


Confirm Plan Eligibility Rules

The first thing to be clear on is the eligibility requirements for the different types of contributions. Are there age and years of service requirements? Are these requirements different for employee elective deferrals, matching, and employer profit sharing contributions? What are the entry dates for contributing (immediately upon meeting age and years of service; monthly, quarterly, semi-annually, annually, or other)? Does the plan have hours of service and/or last day requirements in order to receive employer contributions?

Create System to Track

The system used can be as simple as a spreadsheet to track these dates or a sophisticated Human Resource Management System (HRMS).

An HRMS with online benefits enrollment can enable employees to self-enroll in benefit programs, review their benefits data, and report life event changes over the Internet or a company network. The system prompts employees to choose plans based on eligibility. You can monitor the status of the enrollment in real-time. Having benefits managed through an HRMS makes it easier to track dates and prevent double-entry of data.

Track Eligibility

Once you have your system in place, consistently use it to track eligibility. Once a month (or whatever your plan’s eligibility requirements are), notify all newly eligible employees of their eligibility to participate in the plan.

Keep in mind that, despite all of your good efforts, mistakes can happen. In that case, the IRS can help you correct the problem and retain the benefits of your qualified plan.

Plan sponsors are well advised to have a process in place to monitor that all employees who have the right to participate in the plan are given the opportunity to participate, in accordance with the plan document.



The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.