Plan Design, Eligibility, and Coverage Requirements
Eligibility rules
IRC 410(a) caps age and service conditions: age 21 and one year of service (1,000 hours in a 12-month period, or the elapsed-time equivalent). A plan may use two years of service only if it provides 100% immediate vesting thereafter. Entry dates cannot be later than the first day of the plan year or the first day of the seventh month of the plan year. Plans may exclude collectively bargained employees, nonresident aliens with no US-source income, and employees under age 21 or with less than one year of service when coverage testing (410(b)(4)).
Coverage: IRC 410(b)
A plan must benefit at least 70% of non-highly compensated employees (NHCEs) under the ratio percentage test, or satisfy the average benefit test: a nondiscriminatory classification test plus an average benefit percentage of at least 70%. Defined benefit and 401(k)/401(m) plans must also satisfy IRC 401(a)(26), which requires a DB plan to benefit the lesser of 50 employees or 40% of all employees. Controlled groups (414(b), (c)), affiliated service groups (414(m)), and leased employees (414(n)) are aggregated before you count anyone.
Traps
Watch hours-versus-elapsed-time measurement, and remember 1,000 hours is a vesting and allocation concept, not the statutory eligibility standard. Excluding a class of employees is permitted only if the class fits an allowed exclusion. Do not reuse the ADP testing population for coverage; the two tests use different rules.
Worked example: 100 NHCEs and 20 HCEs. The plan covers 60 NHCEs (60%) and 15 HCEs (75%). Ratio percentage = 60 ÷ 75 = 80%, above 70%, so the plan passes 410(b) without the average benefit test.