The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 21. Qualifying Rules

EMPLOYERS WHO SPONSOR 401(K) plans must observe certain rules on when employees can participate in a company plan. Employers are permitted to impose two eligibility requirements. The first is called the "year of service requirement." It allows the employer to say that you must work for the company for a certain period of time before you are allowed to participate in the plan. But that time period cannot be more than one year. The exception to this is if an employer offers complete vesting at the end of two years of service.

The employer is also permitted to say that participants must be a certain age before contributing, but the maximum age the employer is permitted to specify is twenty-one. In combination with time constraints, an employer may say you must be nineteen years old and work for the company for six months before you can contribute to the plan, or that you must be twenty years old and work for the company for one year. In any case, the employer may not require contributors to be older than twenty-one or have a waiting period longer than one year. An exception to the rule is that educational institutions may limit participation until age twenty-six, according to Kyle Brown of Watson Wyatt benefit consultants.

A year of service is calculated as a twelve-month period beginning on the first day of employment during which an employee works at least 1,000 hours, which is roughly a twenty-hour workweek. If an employee begins work on January 1 but ...