A:

It is very unlikely that you will find a qualified plan or an IRA-based plan that will allow the employer to exclude other employees, as all employees must be allowed to participate in the plan when they meet the eligibility requirements.

An alternative is to include strict eligibility requirements in the plan. For instance, many employers choose to adopt a plan with eligibility requirements that would allow only certain employees to participate in the plan and/or receive plan benefits; they include the following:

  • A plan may require an employee to complete an annual 1,000 hours of service for up to two years in order to become eligible to participate in the plan. If an employee works fewer than 1,000 hours each year, they may be excluded if your client chooses to adopt this 1,000-hours requirement. Of course, this may not be possible with full-time employees.
  • A plan may also implement a vesting schedule. For instance, the plan may require the employee to work for at least five years in order to become entitled to the contributions made to the plan on his/her behalf. For employees who leave before the five-year period, their contributions would revert back to the plan or, in other words, be forfeited. For plans that adopt a two-year service requirement in order to become eligible to participate, contributions are immediately 100% vested.

Alternatively, the employer may choose to adopt a non-qualified plan, such as an excess-benefit plan or a top-hat plan. For non-qualified plans, employers may limit participation to business owners or highly compensated employees.

For further reading, see 401(k) Plans for the Small Business Owner, Plans the Small Employer Can Establish and Establishing an SEP IRA.


This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS

  1. How can I get a "pensionado" visa to retire in Costa Rica?

    Find out how to apply for a pensionado retirement visa for Costa Rica, how to prove your income and obtain a certificate ...
  2. How does private placement affect share price?

    Understand what it means when a company does a private placement, and learn how this typically impacts the share price of ...
  3. What are the financial benefits of retiring in the Philippines?

    Read about the many financial benefits of retiring in the Philippines as an American expatriate, including low health costs ...
  4. How can I get a 'pensionado' visa to retire in Costa Rica?

    Read about how you can obtain a pensionado visa to retire in Costa Rica, including what kinds of applicants the Costa Rican ...
RELATED TERMS
  1. Per Transaction Fees

    An expense a business must pay each time it processes a customer’s ...
  2. Operating Cost

    Expenses associated with administering a business on a day to ...
  3. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  4. Self Invested Personal Pension (SIPP)

    A tax-efficient retirement savings account available in Great ...
  5. Age Discrimination In Employment Act Of 1967

    A federal statute protecting "certain applicants and employees" ...
  6. Senior Move Manager

    Senior move managers (SMMs) help seniors downsize and relocate ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    Top 7 ETFs Designed for Retirement Income

  2. Professionals

    5 Signs That You Have a Lousy 401(k) ...

  3. Entrepreneurship

    Should I Have An IPO on My Business

  4. Entrepreneurship

    Why Small Business Owners Need Financial ...

  5. Mutual Funds & ETFs

    Top Commodities ETFs for Your Retirement ...

Trading Center