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February 20, 2009

Eligibility

Your Guide

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Definition

The parameters that determines whether a participant meets the requirements for certain retirement plans and/or plan benefits. Eligibility is  defined in the plan document or IRA agreement .For employer sponsored plans, the plan sponsor determines eligibly, within statutory limits. Examples of eligibility include the following:

  1. An individual being eligible to make an Roth IRA contribution, by having eligible compensation and by the individual’s MAGI not exceeding the statutory limits
  2. An active participant’s eligibility to deduct a contribution to a traditional IRA is determined by his tax-filing status and MAGI
  3. An individual’s eligible to make salary deferral contributions to a 401(k) plan is determined by whether he/she has satisfied the age and service requirements
  4. An individual’s eligible to receive employer contributions is determined by whether he/she has satisfied the age and service requirements

Eligibility also refers to an employer’s eligibly to adopt/sponsor a retirement. The following semi-chart provides some examples:

Feature/
Benefit

SEP IRA

SIMPLE IRA

SIMPLE 401(k)

Solo-k/
Individual-k

Traditional 401(k)

Money Purchase

Profit Sharing

Defined Benefit Plan

Eligible Employer

Any employer. Employers using the services of leased employees, maintaining any other retirement plan or ever maintained a defined benefit plan cannot use the form 5305-SEP. Must use other SEP document instead

Any employer, providing the employer had no more than 100 employees with $5,000 or more in compensation during the preceding year.
Generally, SIMPLE IRA must be the only plan maintained by the employer

Any employer, providing the employer had no more than 100 employees with $5,000 or more in compensation during the preceding year.
Employees eligible under the SIMPLE 401(k) plan may not participate in any other plan

Any employer, providing only the business owners (which includes the business owners’ spouse by definition) are eligible to participate in the plan.

Any employer.

Referring Cite

Governing plan document or agreement

Additional Helpful Information

The statutory eligibility requirements for employer sponsored plans vary among plan types. For instance:

  • A 401(k) plan cannot require more than one year of service for eligibility purposes
  • A SEP cannot require more than 3-years of service for eligibility purposes.
  • For qualified plans, an employer can require no more than 1,000 hours of service during a 12-month period for purposes of determining 1-year of service .
  • For SEP IRAs, a year-of-service is any period, however short.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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