3841 / What are the age and service requirements that can be used for qualified plans?

Editor’s Note: The SECURE Act modified the service requirements to expand access for certain part-time employees. Under the new law, employees who perform at least 500 hours of service for at least three consecutive years (and are at least 21 years old¹) also must be allowed to participate in the employer-sponsored 401(k).² SECURE 2.0 reduced the three-year period to two years for tax years beginning after 2024.  These long-term, part-time employees may, however, be excluded from coverage and nondiscrimination testing requirements.³ The new rule also does not apply to employees covered under collectively bargained plans.⁴

A plan document need not set any threshold for employees to meet before becoming eligible to participate in the plan. That is, every employee could be eligible on being hired.

Most employers, however, favor requiring a new employee to work for a period of time and to attain a specific age before he or she is eligible to participate. The longest period and oldest age that may be set in a plan document is established by the IRC and is referred to as minimum age and service.

Under the rules, a plan generally may not require that an employee complete a period of service extending beyond the later of age 21 or, under pre-SECURE Act law, the completion of one year of service.⁵ The one year period could extended to two years if the plan provided that after not more than two years of service each participant has a non-forfeitable right to 100 percent of the accrued benefit.

Under the SECURE Act 2.0, employees must be eligible to participate in a 401(k) upon the earlier of (1) the plan’s eligibility requirements as established under pre-SECURE Act law, or (2) the end of the first period of two consecutive 12-month periods where the employee has provided at least 500 hours of service. Plans are permitted to allow part-time employees to participate earlier, however.

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Planning Point: While the SECURE Act rule requires employers to allow certain long-term, part-time employees to participate in the 401(k), it does not require employers to contribute on behalf of those employees (although employers are free to do so). The law only requires that these employees be permitted to make their own contributions to the 401(k).

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Planning Point: The new law applies to 401(k) plans, but absent future guidance to the contrary, does not change the rules for part-time participants in 403(b) plans.

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This SECURE Act provision is effective for plan years beginning after December 31, 2020. However, 12-month periods beginning before January 1, 2021 were not taken into account for purposes of determining whether an employee qualifies.

In the case of a plan maintained exclusively for employees of a tax-exempt (under IRC Section 501(a)) educational institution, the minimum age limitation can be 26 instead of 21, but only if the plan provides that each participant having at least one year of service has a non-forfeitable right to 100 percent of the accrued benefit.⁶

A plan must provide that any employee who has satisfied the IRC’s minimum age and service requirements specified above (and who is not otherwise excluded as a class) is eligible to participate in the plan no later than the earlier of the first day of the first plan year beginning after the date on which the employee satisfied such requirements, or the date six months after the date on which the employee satisfied such requirements.⁷ Special rules apply to calculation of service for this purpose.⁸

Plans can use shorter periods and younger ages, and some designs favoring highly paid owners have every employee enter the plan, even those who, by the nature of their job, would never obtain a vested benefit. In a 2004 memorandum to its staff, the IRS expressed disapproval with these and other plan designs that attempt to satisfy various IRC requirements by opening participation to rank and file employees with very short periods of service. These plans may be the subject of adverse rulings or other action.⁹

Not all employees meeting a plan’s age and service requirements will be eligible for plan participation. Other requirements not related to age or service may be imposed by a plan as a condition of participation.¹⁰ These individuals are referred to as excluded employees. For example, it is possible to structure a plan that is limited only to salaried employees, although additional testing will generally be required ( Q 3842). Nevertheless, if the effect of a plan provision is to impose an additional age or service requirement, that provision will be treated as an age or service requirement even if it does not specifically refer to age or service.¹¹ The IRS has stated that this problem exists when a plan document excludes “part-time” employees from the plan. These provisions are treated as violating the minimum age and service rules under IRC Section 410(a) even if they otherwise would satisfy minimum coverage under IRC Section 410(b).¹²

The year of service for determining eligibility generally meant a 12-month period, measured from the date the employee became employed, during which the employee has worked at least 1,000 hours. This is referred to as the hours of service method of determining years of service.

A plan could require less, but not more, than 1,000 hours in a 12-month period to determine the threshold for being credited with a year of service.

Another method that may be used to calculate a year of service looked at the period from hire to a “separation of service” to see if the 12-month period has passed. This was referred to as the elapsed time method.¹³

In addition, special rules apply where there are breaks-in-service and where there is absence from work due to pregnancy, childbirth, or adoption of a child.¹⁴ Special rules also apply in the cases of seasonal industries and maritime industries.¹⁵

Service with former employers may be credited for the purpose of determining eligibility to participate in a plan provided the former employers are specified in the plan or trust, all employees having such past service are treated uniformly, and the use of the past service factor does not produce discrimination in favor of highly compensated employees ( Q 3848).¹⁶ The IRS also has permitted individuals to be credited for services performed as partners or sole proprietors before becoming employees in a successor corporation for this purpose.¹⁷ Companies working with the Defense Department frequently will credit service within the armed forces for eligibility or vesting.