Eligibility Determination

Determining required plan eligibility

We are pleased to provide these instructions to assist you, the Plan Sponsor, in administering the determination of retirement plan eligibility. It is important that your organization's Plan Administrator understands how it is that retirement plan eligibility is determined and what the "next steps" are as they relate to newly eligible Participant notifications and enrollments.

In the event of an IRS audit of your retirement plan, it is likely that you will need to demonstrate that all newly eligible Participants have been provided with meaningful notice of eligibility once they have become eligible to participate in the retirement plan. The starting point regarding providing the required notifications is the actual determination of when it is that the employee becomes eligible to participate in the plan.

Here is a summary of Eligibility rules:

Understanding Universal Availability:

The new regulations require that all Plan Sponsors provide Universal Availability to the retirement plan. This means that all employees are eligible to participate in the retirement plan on a voluntary basis, upon hire. This does not mean that all employees are eligible to receive employer basic or matching contributions. It does mean that every employee can contribute their own money into the plan upon hire. Employer contributions and matching contributions are governed by your plan design and detailed in your Plan Documents and Summary Plan Description.

Below are the steps to confirm eligibility for your Participants:

Step 1 - Identify the plan's eligibility requirements:

Review the plan's eligibility rules in the Plan Document's Adoption Agreement and/or Summary Plan Description. The eligibility rules for both employee and employer contributions are clearly outlined in both of these documents. An example of the eligibility rules as outlined in a Summary Plan Description might include:

The Plan Document represents the legal description of the retirement plan. It is typically made up of three components; the Plan Document, the Adoption Agreement and the Summary Plan Description:

"All employees are eligible to participate in the plan on an elective deferral (voluntary contributions) basis upon hire.

You will enter the employer contribution portion of the plan on the first entry date after you begin employment if you work 20 or more hours during the week (or 1,000 or more hours in your initial year of service). You must have attained the age of 18 to be eligible for that part of the plan that is funded with employer contributions.

The plan provides for monthly entry dates, on the first day of the month following your date of hire."

Be aware that many plans include "dual eligibility." In other words, there is one service requirement associated with the elective deferrals (voluntary contributions). And there is a second service requirement associated with the employer contributions, such as an employer matching or an employer basic contribution. An example of dual eligibility rules as outlined in a Summary Plan Description might include:

"All employees are eligible to participate in the plan on an elective deferral (voluntary contributions) basis upon hire.

You will enter the employer contribution portion of the plan following the successful completion of one year of service. This is for those staff who worked 1,000 or more hours during their initial year of service. You must have attained the age of 18 to be eligible for that part of the plan that is funded with employer contributions.

The plan provides for monthly entry dates, on the first day of the month following your date of hire."

Step 2 - Identify employees who have satisfied the plan's eligibility requirements:

Identify the employees who have satisfied the plan's eligibility requirements as outlined above. This must be done in a timely fashion; otherwise the plan, in function, will be non-compliant. In other words, the plan will not be operating in accordance with the legal Plan Document. Operational failures to the plan can result in plan disqualification, meaning that the IRS could require that all the assets of the plan be distributed from the plan.

Many Plan Sponsors develop a system whereby newly hired staff are notified of their ability to participate in the plan as part of their new hire orientation and then use a tickler system to remind them of when it is that the Participant becomes eligible for the employer contributions.

Step 3 - Provide notifications to the newly eligible staff:

The details associated with notifying newly eligible Participants of their ability to participate in the retirement plan to include sample communication pieces like the Welcome Letter, Personal Retirement Guide and Summary Plan Description, available on the Plan Sponsor Instructions for Enrolling Participants.