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Qualified Plans: Eligibility
Requirements
For Employers
Who May Adopt a Qualified Plan? Any business, including sole proprietorships,
partnerships, corporations, and government entities may adopt a qualified plan.
An employee may not adopt a qualified plan, but an employee may participate in a
qualified plan established by his or her employer.
A qualified-plan document generally consists of an adoption agreement and the
basic plan document, which provide the provisions under which the plan must
operate. The employer formally adopts the plan by passing a resolution (if
applicable) to adopt the plan, completing the adoption agreement, and notifying
the employees with a Summary Plan Description (SPD), which must be written in
non-legal language so that the average person can understand it.
The information that must be provided in the SPD includes:
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The identification number and
location of the plan.
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A description of what the plan
provides for employees and how it operates.
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When employees may begin to
participate in the plan.
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How employees service and
benefits are calculated.
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When employees benefit becomes
vested.
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When employees will receive
payment and in what form.
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How employees may request
benefits.
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Circumstances under which
employees may lose or be denied benefits.
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The employees rights under
ERISA.
Employees should read the SPD to
learn about the particular provisions that apply to them. If the provisions of a
plan are changed, employees must be notified in a revised SPD or in a separate
document called a Summary of Material Modifications (SMM).
Choosing A Plan Provider
An employer may choose to establish an individually-designed plan or use an
IRS-approved prototype plan provided by a sponsoring organization.
Individually-Designed Plans
An individually-designed plan is drafted to meet the needs of one employer, so
no other employer may use this individually-designed document. Typically, large
companies who want their plan to meet certain specifications that may not be
available in a prototype plan adopt individually-designed plans.
Although advance IRS approval is not required for an individually-designed plan.
If, however, the employer would like confirmation from the IRS that the
qualifications meet prescribed rules and regulations, the employer can apply for
approval by paying a fee and requesting a determination letter. Drafting the
plan may require assistance from a lawyer or tax professional, and the fees for
this service vary among professionals. The IRS may charge a fee for any
determination letter that the employer requests.
Master or Prototype plans
Master and prototype plans, which are already IRS approved, are popular among
small business owners. Those who adopt a prototype plan have no need to request
a determination letter. Unlike the individually designed, master and prototype
plans can be used by an unlimited number of employers. Under a master plan, a
single trust or custodial account is established as part of the plan for the
joint use of all adopting employers. Under a prototype plan, a separate trust or
custodial account is established for each employer.
The following are some of the organizations that can sponsor IRS-approved master
or prototype plans: Banks (including some savings and loan associations and
federally insured credit unions), trade or professional organizations, insurance
companies., mutual fund companies, attorneys, financial planners and
accountants.
Establishment Deadline
A qualified plan must be established by the last day of the employer's tax year,
and the employer contributes to the plan for that year and subsequent years as
provided in the plan.
For Employees (Plan Participants)
Employees must meet certain eligibly requirements to participate in the plan
their employer adopts. Business owners should therefore take care not to
implement eligibility requirements that would exclude them from participating in
the plan. For instance, a business owner who is 18 years of age should not
implement an eligibility requirement of age 21 as he or she would be excluded
from participating in the plan.
Eligibility Requirements for Plan Participation
In general, an employee must be allowed to participate in a qualified plan after
meeting the following requirements:
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Has reached age 21 - An
employee can be excluded for not having reached a minimum age (which cannot
exceed age 21) but cannot be excluded for having reached a maximum age. For
instance, an employee cannot be excluded from the plan because he or she is,
say, 100 years old.
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Has at least one year of
service - This requirement is two years if the plan is not a 401(k) plan
and provides that after not more than two years of service the employee has a
non forfeitable right to all his or her accrued benefit (i.e., all
contributions are 100 percent vested). For qualified plan purposes, a year of
service is generally 1,000 hours of service performed during the plan year.
Employees who do not perform 1,000 hours of service are not considered to have
performed one year of service, even if services were performed for a 12-month
period.
An employer may implement less
restrictive eligibility requirements, such as a minimum age younger than 21 or a
service requirement less than one year and 1,000 hours of service. These other
eligibility criteria, however, must be within the parameters of the rules and
regulations that govern qualified plans. Unless the IRS has approved a plan
document that includes these other eligibility requirements, an employer must
consult with legal counsel regarding these requirements before they are
implemented. An employer may choose to exclude employees who are covered under a
collective bargaining agreement (unionized) or who are certain nonresident
aliens.
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Contribution Rules
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