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Decoding Your Adoption Agreement 02: Understand the Definition of Eligibility

Understand the Definition of Eligibility

Your retirement plan’s Adoption Agreement specifies the requirements an employee must meet in order to be considered eligible to participate in the plan. Generally, eligibility is based on age and/or years of service. You can also have no age or service requirements.

Service Requirements

12 months is the maximum waiting period permitted by law. If you elect 12 months, the service can be credited either based on hours of service or by elapsed time.

  • Hours of Service. The hours of service can be calculated by tracking the actual numbers of hours that each employee works (actual hours method) or you can credit each employee with a fixed number of hours during a certain unit of time, such as number of hours per day, semi-monthly, or monthly (equivalency method).
  • Elapsed Time. The employee’s hours of service is disregarded and a year of service is credited after working 12 consecutive months of service (period of service).

If you have participating employers on your Plan, confirm whether your Plan recognizes their service with the previous employer?

Age Requirement

21 is the maximum age that you can exclude employees from participating in your retirement plan. You can, however, have no age requirements or have lower age requirements.

After the employee meets the age and/or service requirements, when can the employee start making deferrals (i.e., entry date/date of participation)?

Exclusion of Employees

Do you exclude any group from particular contributions? Typical groups of employees that are excluded are union employees, nonresident Aliens, leased employees, or part-time/temporary/seasonal employees? NOTE: The plan cannot categorically exclude part-time employees. The exclusion generally has an hour of service requirement in order for a part-time employee to be included.

Different Rules Based on Type of Contribution

Another thing to be clear on is whether different types of contributions have different eligibility rules. Is eligibility different for elective deferrals, matching, non-elective profit sharing, or is it the same?


Timely Enrollment

  • Problem: The Plan Administrator does not provide adequate notice for employees to timely enroll in the plan. If the company provides matching contributions, a participant could miss out on receiving employer contributions.
  • Solution: 30 days before next enrollment window notify and provide enrollment instructions to all newly eligible employees and those who are not enrolled.

No Evidence of Declining Participation

  • Problem: No evidence that all eligible employees have been given the opportunity to enroll in the retirement plan.
  • Solution: Whether your employees enroll using an online system or via a paper form, the Plan needs to have record that every eligible participant has been given the opportunity to enroll. The paper enrollment form that the employee returns to the Plan Administrator should be in the employee’s file. If your plan uses online enrollment, print out an activity log or confirmation that shows the participant has enrolled or declined participation.

Different Conditions of Eligibility in Document but Uniform Policy in Payroll

  • Problem: Elective deferral and matching contributions could have different eligibility rules (per the plan documents), but payroll treats both types of contributions with the same eligibility rules. This could result in the Employer contributing more to participants than what they should have received. During your annual testing, your TPA would then have to forfeit the amount not eligible to receive, leaving the employer to explain the mistake to your employees.
  • Solution: Ensure proper tracking / counting of hours / entry dates for all employees and that your payroll processor and provider are on the same page.


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.