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Every year as plan sponsors complete their census requests, we find many clients have the same questions or make the same assumptions.  A somewhat common notion is “part-time employees are excluded from our plan.”  Although this might be true under certain circumstances, part-time employees, as a class, may not be excluded from participation.  This newsletter will address when and how part-time employees may be excluded from a qualified plan.


Age and Service Requirements

If any employee is to be excluded from participation, it must be specified within the plan document.  For example, a 401(k) plan may impose an age and/or service requirement (not to exceed age 21 and one year of service) as a condition of participation.  If a year of service is defined as twelve consecutive months in which the employee works 1,000 hours or more, part-time employees working fewer than 1,000 hours per year will never become eligible for the plan.    If a “part-time” employee did manage to work 1,000 hours or more during the year, then he or she would be eligible to enter the plan if still employed on the plan’s next entry date.  Under this scenario, most part-time employees would be excluded as a result of applying the conditions of participation, but not simply because they were classified as “part-time”.


Other Conditions of Participation

 Plan sponsors who exclude part-time, seasonal, intern, or temporary employees from receiving other employer-provided benefits, such as health care, cannot as a matter of practice simply exclude these employees from participating in the plan.  If any of these employees meet the plan’s age and service requirements, they must enter the plan on the next entry date.  The plan sponsor may, however, establish other conditions of participation in addition to the age and service requirements, but this is where it gets tricky.  Following are the important points to note:

  • Plan provisions that have the effect of implementing an age or service requirement will be treated as if they imposed an age or service requirement.

  •  A service requirement for a 401(k) plan that could result in the exclusion of an employee who has completed a year of service is not allowed.  This is true even if after excluding all such employees, the plans satisfies the coverage requirements of §410(b).

 In other words, a plan that imposes an indirect service requirement for plan participation that could exceed one year of service will fail to be a qualified plan.



 On February 16, 2006, the Internal Revenue Service issued an Employee Plans Determination Quality Assurance Bulletin addressing the treatment of part-time employees.  IRS Specialists have been directed to scrutinize any exclusion classification that refers to service, either directly or indirectly.  Exclusion classifications without reference to service will not be challenged.  The Bulletin provides several examples of exclusion classifications that may or may not be allowed.  Here are the highlights:

  • Plan B provides for one year of service as a condition of participation.  It also provides that employees classified as part-time or seasonal shall not be eligible to participate in the plan.  Plan B defines part-time or seasonal employees as those who are scheduled to work fewer than 1,000 of service in a year.  Plan B’s exclusion could result in the improper exclusion of an employee who worked more than his or her “scheduled” hours of service.  Plan B would have to be amended to re-define the exclusion classification or to include failsafe language which provides that, exclusion classifications notwithstanding, any employee who works at least 1,000 hours of service in an eligibility computation period will be an eligible employee.

  • Plan C requires one year of service as a condition of participation.  Plan C also provides that employees classified as Hourly Paid Employees (“HPEs”) will be excluded from participation.  HPE's are defined as employees that receive an hourly wage for their services.  Since the plan is providing for the exclusion of a class of employees based on job classification (and not directly or indirectly based on age or service), this classification would not be challenged.  Of course Plan C also would have to pass coverage testing under §410(b) with regard to the excluded employees.

  • Plan D requires one year of service as a condition of participation and also provides that “Class B Employees” will not be eligible to participate.  First, Plan D must define Class B Employees.  If necessary, the plan must be amended to include this definition.  In the Bulletin’s example, the definition of Class B Employee is “any employee who is a member of the substitute workforce of the Employer, as distinguished from regular full-time and part-time employees, that is a separate employment classification based on availability to work.”  Because the exclusion classification is not based on a specified number of hours of service but rather on the availability to work, the plan is in compliance in form.  In operation, the plan also will have to pass coverage testing with regard to the excluded employees.


Final Notes


The IRS has emphasized that a determination letter issued after June 30, 2001 may not be relied on with respect to whether a plan’s exclusion classifications (if any) violate the requirements of section 410 by indirectly imposing an impermissible age or service requirement.  The issue will be decided on an individual case basis when (or if) the plan is examined by the IRS.


Of course the majority of plans never come under audit, but it’s still important to maintain your plan’s compliance both in form and operation.  Remember you cannot exclude any employee from participation unless the exclusion is specified in the plan document.  Remember also that no exclusion classification may, directly or indirectly, impose a service requirement that could result in the exclusion of an employee who completes a year of service.  If you have additional questions regarding this topic, please contact your consultant.

The general information provided in this guide is based upon complex requirements of the Internal Revenue Code and Treasury Regulations. It is provided with the understanding that, for the purposes of this publication, MBC Retirement Services, Inc. is not engaged in rendering legal, accounting, or other professional services. Although care has been taken to present the material accurately, MBC Retirement Services, Inc. disclaims any implied or actual warranties as to the accuracy of any material herein and any liability with respect thereto.