QUESTION: We wish to amend our 401(okay) plan to exclude all part-time workers from plan eligibility, no matter their hours. Can we do this?
ANSWER: Employers have appreciable freedom to determine which classes of workers can take part of their 401(okay) plans, however that freedom just isn’t limitless. For instance, eligibility restrictions should keep away from violating the Code’s minimal protection guidelines. And repair-based exclusions can not violate the minimal service guidelines. Underneath these guidelines, workers usually can’t be required to have greater than 1,000 hours of service in a chosen 12-month interval previous to collaborating. As well as, long-term part-time workers can’t be required to have greater than three consecutive 12-month durations of no less than 500 hours of service earlier than they will make elective deferrals. (Deferrals will not be required beneath the three-year rule previous to 2024, nonetheless, as a result of solely 12-month durations after 2020 have to be counted.)
Your query signifies that you simply wish to exclude all part-time workers no matter their precise service. That type of categorical exclusion might sound totally different from an hours of service requirement, but when your organization is like many employers, part-time standing could also be based mostly on anticipated or scheduled service. And within the IRS’s view, a service-based eligibility threshold that doesn’t rely precise hours of service will nonetheless fail the hour-counting guidelines if, in operation, it excludes workers whose precise service satisfies an relevant hour-counting threshold. For instance, in case your plan had been to outline part-time workers as workers who’re “frequently scheduled” to work 20 or fewer hours every week, the plan would possibly find yourself excluding workers who really work 20 hours every week for 52 weeks and subsequently have 1,040 hours of service for the yr. In that occasion, your plan can be utilizing a service-based threshold to exclude workers who the truth is have happy the Code’s 1,000-hour minimal service rule. And starting in 2024, workers with even fewer hours is not going to be excludable from elective deferrals on account of their service if they really labored no less than 500 hours in three consecutive 12-month durations.
One method to excluding workers who will not be full-time is to search for a standard denominator among the many workers that you simply want to exclude—reminiscent of job perform or job location—that isn’t service-based. For instance, if most of your part-time workers are performing the identical job perform or work on the identical location and you’re prepared to exclude your whole different workers who carry out the identical job perform or work on the identical location, you might be able to craft a rule that excludes these part-time workers with out violating the Code’s minimal service guidelines. Watch out, although, as a result of no less than one IRS consultant has indicated that even standards that aren’t service-based could violate the Code in the event that they merely disguise an improper service rule. Lastly, we word that errors in making use of the eligibility guidelines to part-time workers ceaselessly flip up in voluntary compliance and IRS audits. It’s vital that the plan’s phrases clearly state your organization’s design selections, particularly when excluding sure lessons of workers. Furthermore, you need to routinely evaluate plan language to make sure that it displays altering employment practices.
For extra data, see EBIA’s 401(okay) Plans handbook at Sections VII.C (“Eligibility Situation #2: Participation Restricted to Class of Eligible Workers Outlined in Plan”), VII.D.2.d (“Minimal Service Requirement: Lengthy-Time period Half-Time Workers”), XXXII.D (“Voluntary Compliance Audits”), and XXXIV.E (“Correcting Plan Errors: Errors Involving Eligibility”).
Contributing Editors: EBIA Employees.