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Eligibility and Entry Date Errors in 401(k) Plans

Authored by Matt Waters

Few things frustrate employees more than finding out they were left out of their company’s 401(k) plan. Or discovering later they should have been eligible months ago. For employers, eligibility and entry date mistakes are one of the most common compliance failures the IRS and DOL uncover.

The rules may seem straightforward, but the details (and recent law changes) make this a frequent trap for plan sponsors.

How Eligibility Works

Every 401(k) plan spells out its own eligibility requirements in the plan document, often based on:

  • Age (commonly 21)
  • Service (e.g., one year of service, defined as 1,000 hours worked)

Once an employee satisfies those requirements, they can enter the plan on the next entry date (e.g., January 1 or July 1).

Where Plans Go Wrong

  1. Late Entry Dates

    • An employee meets eligibility but isn’t enrolled until a later pay period (or not at all).
  2. Miscounting Service Hours

    • Especially common with part-timers, variable-hour employees, or rehired workers.
  3. Applying Rules Inconsistently

    • Different locations or managers interpret eligibility differently.
  4. Ignoring SECURE Act Requirements

    • Beginning in 2024, long-term part-time employees (500+ hours in 3 consecutive years, dropping to 2 years in 2025 under SECURE 2.0) must be allowed to defer. Many payroll systems aren’t set up to track this correctly.

The Fallout

  • Missed Deferrals: Employees lose the chance to contribute when they should have been allowed.
  • Missed Employer Contributions: If a match or profit-sharing was tied to those deferrals, the employer owes even more.
  • Correction Costs: Employers must make a contribution to “true up” the missed opportunity, plus lost earnings.

Correcting Eligibility Errors

The IRS correction program, Employee Plans Compliance Resolution System or EPCRS, provides guidance:

  • Missed Deferral Opportunity: Employer must contribute 50% of the employee’s missed deferral (based on average deferral rate for their group).
  • Employer Match: Must be made in full as if the deferral had occurred.
  • Lost Earnings: All corrections are adjusted for earnings through the date of correction.

Example: If an employee should have been allowed to defer 6 months ago and missed $3,000 of deferrals, the employer owes a $1,500 corrective contribution plus the missed match and earnings.

How to Prevent Eligibility Mistakes

  1. Align Payroll and Plan Documents

    • Make sure payroll systems track service hours according to plan definitions.
  2. Automate Enrollment

    • Automatic enrollment greatly reduces the risk of “forgotten” eligible employees.
  3. Centralize Responsibility

    • Don’t leave eligibility tracking up to managers. Your HR/payroll team should handle it consistently.
  4. Review SECURE Act Rules

    • Ensure your systems are ready for part-time employee tracking and enrollment.
  5. Regular Compliance Checks

    • Spot-check eligibility lists against actual payroll and hours at least quarterly.

Bottom Line

Eligibility errors may be easy to make but could be expensive to fix. They can undermine employee trust and create significant employer liability if not caught early.

By aligning systems with the plan document, automating enrollment, and monitoring service data, plan sponsors can avoid this common pitfall and keep their 401(k) running smoothly.

Have questions about late 401(k) contributions? Reach our to our team of professionals at Prime Capital Financial Denver to see how we can help. 

 

Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. Tax planning and preparation services are offered through Prime Capital Tax Advisory. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness | Family Office | Tax Advisory.

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