ELIGIBILITY AND PARTICIPATION | Plan Qualification Requirements

The employer must decide what group is to be covered by the qualified plan. In a closely held business, the employer will often want to provide a large portion of the plan's benefits to controlling and key employees and minimize benefits for rank and file employees. In larger plans, employers will often want to provide a different qualified plan (or no plan) for different groups of employees for various reasons; for example, the existence of collective bargaining units with separate plans, a desire for different benefit structures for hourly and salaried employees or differences in benefit policy for employees at different geographic locations.

In reviewing the many limitations imposed on the plan designer by the qualified plan rules, note that the overriding purpose for most of these rules is to prevent discrimination by the employer in favor of highly compensated employees. A secondary purpose, related to the first, is to provide and maintain some security of benefits for participants, particularly participants who are not highly compensated. Most of the qualified plan rules can be explained by these rationales; most questions about the meaning of particular rules and how they apply in a particular situation can be resolved by referring to these basic purposes of the law.

The Code imposes two types of limitations on the employer's freedom to designate the group of employees to be covered under the plan. The first limitation applies to the plan as it exists on paper—the eligibility provisions written into the plan. The second type of limitation applies to the plan in operation and provides minimum coverage requirements in the form of three alternative coverage tests. Both limitations are contained in Code Section 410 and its accompanying regulations and rulings.

First of all, as to plan coverage in the document itself, the designer has a good deal of freedom. The plan may cover only employees at a certain geographic location, employees in a certain work unit, salaried employees only, hourly employees only, or almost any other variation. However, when eligibility is restricted on the basis of age or service with the employer, there are specific limits.