401(k) Rescue, the Ekon Benefits 401(k) Fix-It Series, describes the most common 401(k) mistakes as determined by the IRS. We provide explanations of common mistakes, suggested prevention techniques and recommendations on correction methods.

Common Mistake #6: Exclusion of Eligible Employees

Eligibility for a 401(k) plan should be determined based on the definition of “eligible employee” found in the plan document. The risk of excluding an eligible employee can be minimized by ensuring that employee data—such as date of birth, date of hire, and hours of service—is accurate.

For a plan to qualify for tax-preferential treatment, it must comply with the following eligibility and participant standards:

• Minimum Age Requirement: The plan cannot require an employee to be over the age of 21 to be eligible.
• Service Crediting: There are two methods for crediting service:
  • Hours of Service: The plan may require up to one year of service (whether based on the calendar year, plan year, or another 12-month period) in which the employee works at least 1,000 hours to be eligible.
  • Elapsed Time: Eligibility is typically determined based on a 12-month consecutive period, without requiring a specific number of hours worked.
• Entry into the Plan: An employee who satisfies the plan’s age and service requirements must be allowed to enter the plan no later than the earlier of (1) the first day of the next plan entry date, or (2) 6 months after meeting eligibility.

Note: Under SECURE Act 2.0, long-term part-time employees (working at least 500 hours in 2 consecutive years) also need to be included for deferral purposes, even if previously excluded.

If an eligible employee is mistakenly excluded from participating in the plan, self-correction is often available. The employer may be required to make a qualified non-elective contribution (QNEC) on the employee’s behalf to compensate for the missed deferral opportunity. The typical QNEC amount is 50% of the missed deferral, which is calculated by multiplying the employee’s compensation for the year by the actual deferral percentage (ADP) of the employee’s group (HCE or NHCE) for that year. The correction may also require 100% of any missed employer match, plus earnings. If the error is caught and corrected quickly, a reduced correction may apply under EPCRS.

For a complete listing of the most common 401(k) mistakes, please visit the IRS 401(k) Plan Fix-It Guide. For assistance in correcting a plan error, please contact Ekon Benefits at (314)367.6555 or info@ekonbenefits.com.