Employee Benefit Plan Guide for Plan Administrators – Part 1: Eradicating Eligibility Errors
During our audits of 50+ employee benefit plans each year, our team at Delap has seen it all when it comes to employee benefit plan compliance issues. In a previous blog post we identified participant eligibility issues as one of the top 3 operational violations we see. What type of participant eligibility issues do we see most often? The most common violations we discover are due to the Plan not being operated in accordance with the Plan Document. The Plan Document specifies the provisions of each plan and can differ significantly from one plan to the next. Many of the common differences related to participant eligibility include:
- Types of excluded employees – One common election is the type of employees excluded from participating in the plan. Many plans exclude union, leased, temporary, and/or foreign employees from participating in the plan, so you should make sure to consider your Plan Document to verify whether or not these employees are eligible to participate in your plan, and if there are any other types of excluded employees.
- Eligibility requirements – The Plan Document also specifies what requirements must be met before an employee can participate in the plan. Many plans have an age requirement (e.g., 18 years of age), as well as a service requirement (e.g., one year of service), before employees become eligible. Since service requirements can vary widely among plans, make sure to understand the nuances of the service requirement within your plan (e.g., Is a year of service based on 1,000 hours? Is a month of service credited after 30 days of employment or must an employee only work one hour during the period?).
- Entry date – Once you determine that an eligible employee has met the plan’s service requirements, it becomes important to understand when the Plan Document permits eligible employees to enter into the plan. Many plans only allow employees to enter the Plan on the first of the month following their satisfaction of the eligibility requirements. Other plans only allow employees to enter quarterly or semi-annually, while some plans allow employees to enter immediately upon hire, or immediately upon satisfaction of the eligibility requirements. As it takes time to process the paperwork for an eligible employee to enter the plan, it is important to make sure that eligible employees are enrolled “as soon as administratively feasible” and the time it takes to process the paperwork be consistent for all employees.
- Nonstandard employees – Then there are the less common circumstances surrounding employees, such as following:
- Do rehired employees enter the plan immediately upon rehire or do they have to meet the eligibility requirements again? Does the answer change if the break-in-service was greater than or less than a year?
- What about temporary employees who were later became full-time employees? How does prior service as a temporary employee impact their eligibility to participate in the plan?
- What about employees of a recently purchased subsidiary? How does prior service with the previous employer impact their eligibility to participate in the plan ?
Every plan has a different answer to these questions based on the provisions within the Plan Document. Make sure to read the Plan Document closely to understand how scenarios such as these should be treated.
- Different eligibility requirements and entry dates for employer contributions – For employers who make a matching or a profit sharing contribution to the plan, all of the above considerations need to be performed again in relation to the eligibility for the employer contribution. Some plans have the same eligibility requirements for all forms of contributions (employee deferrals, employer matching, and employer profit sharing), however many plans have additional or different requirements for an employee to be eligible to receive employer contributions. Review the Plan Document closely to understand whether eligible employees, eligibility requirements, and entry dates differ for each type of contribution.
As you can see, the eligibility rules for each plan can vary significantly based on the specific provisions of the Plan Document.
Hopefully the issues identified above help you to better understand your own Plan Document. Our team at Delap has extensive experience with a variety of Plans and would love to help you sort through any questions you might have regarding your plan. Please contact us today!
Other related blog posts:
- Employee Benefit Plan Guide for Plan Administrators – Part 2: Common Contribution Considerations
- Top 3 Employee Benefit Plan Operational Violations