Why Eligibility Processing for retirement plans is an important and complex process

Defined Contribution (DC) plans are set up and managed for the exclusive benefit of employees and their beneficiaries. Therefore, it is very important to decide on the eligibility criteria for an employee to become a participant of a DC plan. The summary plan document (SPD) clearly defines the eligibility criteria employees must meet, to participate in the plan sponsored by their employers.

The control brought through eligibility provisions at the plan level could serve many purposes, such as: 

1. To meet the regulatory requirement put forth by the IRS towards plan participation eligibility – an example would be the non-  discrimination clause against plan participation
2. To use eligibility as a tool to attract and retain the best employees, by having relaxed or specific eligibility rules
3. To increase the participation rate among employees to be part of plans offered by the employer
4. To exclude specific employee groups from plan participation – such as temporary or part-time employees

Different Types of Eligibility Rules

There are several types of plans offered by employers, based on their specific needs. IRS allows the plan sponsors to have different eligibility rules for these plans. Broadly, eligibility rules for plans could be based on any or a combination of the following:

1. Age of an employee
2. Length of service of the employee with the employer
3. Earnings of the employee in the past and expected earnings in the future (e.g. for plans such as SIMPLE IRA)
4. Employee classifications – Employees are classified by employers in various categories. IRS provides certain guidelines on category of employees that could be excluded from plan participation.

A few examples of employee classifications are: 

1. Specific employee groups – e.g. union / non-union employees
2. Employees categorized based on working hours – e.g. full-time employee and part-time employee
3. Employees based on locations
4. Employees based on type of work they perform, typically described as job characteristics

Why is Eligibility Determination a complex process?

While a few plans use straightforward eligibility provisions – just age or service, many of them use a combination of both. There are other scenarios where eligibility rules for the same plan are amended over a period of time. However, amendments are applicable only to the newer set of employees. The older set of employees would still follow the earlier eligibility rules. This is also referred to as “grandfathering” of eligibility rules. 

A similar scenario appears in the case of plan conversions where the newer plan recordkeeping system must retain the eligibility status of the old participants, and, at the same time, assess new employees for plan participation based on newer plan eligibility rules.

A combination of the above eligibility rules and scenarios makes eligibility determination a complex process. What makes it even more complex is that a plan can have different eligibility rules against different sources offered in the plan.