When do employees become eligible to participate in a 401(k) plan?
Employee eligibility for a 401(k) plan depends on the criteria set by the employer and outlined in the plan document. Common eligibility options include:
- Immediate Eligibility: Employees can participate as soon as they start working.
- Service-Based Eligibility: Participation begins after completing a certain period of service, such as a specific number of hours, months, or years.
Many plans also have an age requirement, typically requiring employees to be at least 18 years old to participate. Employers should refer to their plan document to confirm the specific eligibility requirements.
Can employers exclude certain classes of employees from 401(k) plan eligibility?
Employers cannot exclude employee groups from participating in the 401(k) plan, but they can apply different eligibility requirements for certain types of employees, such as part-time, seasonal, or temporary workers. This feature is available for Pro-level plans and above and must still comply with Internal Revenue Service (“IRS”) rules for minimum coverage and nondiscrimination testing.
How does high employee turnover impact 401(k) eligibility and vesting?
For employers with high turnover rates, immediate eligibility could result in managing many small accounts for short-term employees. In Pro-level plans and above, employers may introduce vesting schedules for employer contributions to help retain talent. Vesting schedules determine when an employee gains full ownership of employer contributions, such as through graded vesting over several years or cliff vesting, where ownership is granted after a set period.
How does automatic enrollment influence employee participation in 401(k) plans?
Automatic enrollment allows employers to deduct elective deferrals from employees' wages automatically unless they opt out. According to the IRS, automatic enrollment can increase employee participation, which may result in various positive outcomes. Recent industry data reported by BenefitsPRO found that plans with automatic enrollment saw a 93% participation rate compared with a participation rate of 70% for plans with voluntary enrollment.
What impact does the SECURE 2.0 Act have on automatic enrollment for 401(k) plans?
Under the SECURE 2.0 Act, 401(k) plans with an original effective date (OED) on or after December 29, 2022, must implement automatic enrollment starting January 1, 2025. The required initial deferral rate must be between 3% and 10%, with automatic annual increases (auto-escalation) of 1% until reaching between 10% and 15%. Employees who are automatically enrolled have a 90-day window to request a refund of their contributions. This type of distribution is called an eligible automatic contribution arrangement (EACA).
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