Chapter 3: Requirements for Eligibility and Participation

Question 2

The statutory plan entry date is the earlier of the first day of the next plan year, or six months after satisfying the statutory age and service requirements.

Answer 2

True.

Question 3

An employee incurs a break in service if he or she is credited with 501 or fewer hours during the eligibility computation period.

Answer 3

False. Generally, a break in service is 500 or fewer hours in an eligibility computation period.

Question 4

An employee permanently loses credit for prior service under the rule of parity.

Answer 4

True.

Question 5

An employee’s actual hours are not considered under the elapsed time method for crediting service.

Answer 5

True.

Question 6

An employee must be employed on the last day of the eligibility computation period to receive credit for a year of service.

Answer 6

False. Although a year of service is not credited until the end of the eligibility computation period, an employee is not required to be employed on the last day of the eligibility computation period to be credited with a year of service.

Question 7

Absences of less than 12 months are treated as continuous employment under the elapsed time method for crediting service.

Answer 7

True.

Question 8

Generally, a plan may require a participant to attain age 24 before entering the plan.

Answer 8

False. Qualified plans may not require that a participant attain an age older than 21 as a condition for plan entry, unless they are governmental or electing church plans that are exempt from the minimum age and service requirements.

Question 9

A 401(k) plan may require two years of service to be eligible for the matching component of the plan.

Answer 9

True.

Question 10

Using less than one year of service for eligibility purposes usually makes it easier for part-time employees to become plan participants.

Answer 10

True.

Question 11

Leased employees are credited with service for eligibility purposes in the recipient employer’s plan, even though they are not employees of the recipient employer.

Answer 11

True.

Question 12

All of the following statements regarding eligibility requirements are TRUE, EXCEPT:

A. A plan may permit employees to participate on their date of hire.

B. A 401(k) plan may require no more than 12 months of service before employees are eligible to make elective contributions.

C. Quarterly entry dates are required if the plan has a 401(k) component.

D. A plan may permit employees to participate before they are age 21.

E. A money purchase plan may require two years of service before employees are eligible to participate.

Answer 12

C. Although it is very common to allow for quarterly entry dates in a 401(k) plan, it is not a statutory requirement.

Question 13

All of the following statements regarding eligibility requirements are TRUE, EXCEPT:

A. A plan’s eligibility provisions may not be amended to exclude a current participant.

B. A new business establishing a plan may have more liberal eligibility requirements for current employees than for future employees.

C. A newly established plan may have more liberal eligibility requirements for current employees than for future employees.

D. A plan may have immediate eligibility for the 401(k) component but a one year of service requirement for the matching component.

E. A plan may have a one year of service requirement for the 401(k) component but require two years of service for the profit sharing component.

Answer 13

A. Eligibility requirements are not a protected benefit. A plan amending its eligibility requirements is not required to grandfather employees who have met the pre-amendment eligibility requirements.

Question 14

Based on the following information, determine when Employee A will enter the plan:

• Employee A is a full-time employee.
• Employee A’s date of birth is December 1, 1990.
• Employee A’s date of hire is March 1, 2010.
• The plan year is April 1 to March 31.
• The plan’s eligibility requirements are age 21 and one year of service.
• The plan uses the ERISA statutory entry dates.

A. March 1, 2011

B. December 1, 2011

C. January 1, 2012

D. April 1, 2012

E. June 1, 2012

Answer 14

D. The participant satisfies one year of service on February 28, 2011, and attains age 21 on December 1, 2011. The statutory entry date is the earlier of the first day of the plan year after satisfying the requirements (April 1, 2012) or six months after satisfying the requirements aune 1, 2012).

Question 15

All of the following employees may be excluded for eligibility purposes, EXCEPT:

A. Nomesident aliens with no U.S. income

B. Employees who have not met the plan’s eligibility requirements

C. Leased employees

D. Employees classified as part-time

E. Union employees subject to a collective bargaining agreement

Answer 15

D. A plan cannot exclude part-time employees as a job classification.

Question 16

All of the following statements regarding break-in-service rules for eligibility purposes are TRUE, EXCEPT:

A. A plan using the counting-hours method determines breaks in service based on
hours credited in the eligibility computation period.

B. Unpaid FMLA leave cannot cause a participant to incur a break in service.

C. A plan using the elapsed time method determines breaks in service based on periods of severance.

D. A retired participant’s period of severance begins on the date the participant retires.

E. A plan using the counting-hours method uses the 12-month period beginning on the day a participant first terminates employment for determining breaks in
service.

Answer 16

E. A plan using the counting-hours method must use the eligibility computation period for determining whether a break in service has occurred.

Question 17

Based on the following information, determine Participant B’s date of participation:

• The plan year is the calendar year.
• Eligibility is determined using the elapsed time method.
• The eligibility requirements are attainment of age 21 and one year of service.
• The plan entry dates are the first day of the month following the satisfaction
• of the eligibility requirements.
• Participant B is a full-time employee.

Event - Date
Birth - August 28, 1989
Hire - February 1, 2010
Termination - January 3, 2011
Rehire - March 15, 2011

A. February 1, 2011

B. March 1, 2011

C. March 15, 2011

D. April 1, 2011

E. January 1, 2012

Answer 17

C. Participant B attains age 21 on August 28, 2010 and satisfies the year of service requirements on January 31,2011. She would normally enter the plan on
February 1, 2011, however, she is not employed on that day. Since she is rehired on March 15, 2011, without incurring a break in service, she enters the plan on
that day.

Question 18

Which of the follOWing statements regarding eligibility computation periods is/are TRUE?

I. The eligibility computation period for a year of service may be less than a 12month period.

II. Using the shift to plan year method, there is usually an overlap between the first and second eligibility computation periods.

III. Using the anniversary method, there is usually an overlap between the first and second eligibility computation periods.

A. I only

B. II only

C. I and III only

D. II and III only

E. I, II and III

Answer 18

B. The eligibility computation period must be a period of 12 consecutive months. Under the anniversary method, the first and second periods will be consecutive
and will never overlap.

Question 19

Which of the following statements regarding the effect of changing a plan’s eligibility requirements is/are TRUE?

I. Existing participants must be allowed to continue participating.

II. Rehired former participants may need to satisfy the new requirements before reentry.

III. A plan is permitted to grandfather in existing participants.

A. I only

B. II only

C. I and III only

D. II and III only

E. I, II and III

Answer 19

D. When the eligibility conditions are amended, the plan is not required to allow existing participants to continue participating if they cannot satisfy the new eligibility
conditions.

Question 20

Based on the following information, determine when Employee A will enter the plan:

• The eligibility requirements are three months (elapsed time) and the attainment of age 21.
• The entry date is the earlier of January 1st or July 1st following the date the eligibility requirements are satisfied.
• Employee A’s date of birth is July 19, 1970.
• Employee A began working part-time on March 15, 2011.
• Employee A became a full-time employee on August 6, 2012.

A. June 15, 2011

B. July 1, 2011

C. March 15, 2012

D. November 6, 2012

E. January 1, 2013

Answer 20

B. Employee A attained age 21 on July 19, 1991 and three months of service on June 15, 2011. The entry dates are January 1 and July 1. Employee A enters the plan on July 1, 2011. When a plan uses the elapsed time method instead of the
counting hours method, hours of service are not counted. Thus, status as a parttime or full-time employee is irrelevant with elapsed time method. Service requirements for eligibility purposes are satisfied once the employee has satisfied
the required period of service.

Question 21

All of the following statements regarding a break in service for eligibility purposes are TRUE, EXCEPT:

A. A plan may define a break in service to be based on more than 12 consecutive months.

B. A break in service is determined by the period of severance when using the elapsed time method.

C. A plan may define a break in service to be 300 or fewer hours in an eligibility computation period.

D. A break in service is determined based on the hours credited during an eligibility computation period when using the counting-hours method.

E. Hours of service credited during certain unpaid leaves of absence are included in determining whether the employee has incurred a break in service.

Answer 21

A. A plan may not define a break in service on a period of more than 12 consecutive months. An employee incurs a break in service for eligibility purposes if he or she is credited with 500 or fewer hours of service during an eligibility computation
period. Note that the 500-hour rule is a minimum standard. The plan may be more liberal by defining a break in service using a lesser hours of service rule (for example, fewer than 300 hours of service in an eligibility computation period), or
by not imposing a break-in-service rule.

Question 22

Which of the following statements regarding eligibility computation periods is/are TRUE?

I. The eligibility computation period may be defined as a 12-month anniversary period following the first computation period.

II. A plan may use a short plan year as an eligibility computation period.

III. The eligibility computation period must be a period of 12 consecutive months.

A. I only

B. II only

C. I and III only

D. II and III only

E. I, II and III

Answer 22

C. The eligibility computation period must be a period of 12 consecutive months. A plan may not use a short plan year as an eligibility computation period without offering an alternative.

Question 23

Which of the following statements regarding the elapsed time method to credit service is/are TRUE?

I. Absences of less than 12 months are treated as continuous employment.

II. Eligibility computation periods must be based on the plan year.

III. It is an effective option for employers who want to exclude seasonal employees.

A. I only

B. III only

C. I and II only

D. II and III only

E. I, II and III

Answer 23

A. Under the elapsed time method, hours of service are not counted and there are no eligibility computation periods to measure. Because an employee may attain a year of service regardless of the number of hours of service, the elapsed time method of crediting service is ineffective if the employer wants to exclude parttime or seasonal employees.

Question 24

Which of the following is/are amendments that may affect the ability of a participant to continue plan participation prospectively?

I. Amend the service requirement for eligibility

II. Amend the age requirement for eligibility

III. Amend to exclude a class of employees

A. I only

B. II only

C. I and III only

D. II and III only

E. I, II and III

Answer 24

E. All of these types of amendments may result in a participant no longer being eligible to participate. Even if an employee has satisfied the age and service requirements for participation, and is a participant, a future amendment to change eligibility conditions could result in that employee no longer being eligible to participate.

When the eligibility conditions are amended, the plan may provide that the existing participants are grandfathered in, meaning that their participation continues even if they do not satisfy the new eligibility conditions. However, grandfathering of existing participants is not required.

Question 25

All of the following statements regarding eligibility requirements are TRUE, EXCEPT:

A. Employees may be required to work two years of service before becoming eligible for a matching contribution.

B. A plan may have different eligibility conditions for different groups of employees.

C. A plan with age 21 and one year of service eligibility requirements may waive those requirements for employees employed when the plan was first established.

D. A money purchase pension plan may require two years of service for eligibility.

E. A plan amendment that changes the eligibility requirement must grandfather in existing participants.

Answer 25

E. Plan amendments changing eligibility requirements often grandfather in existing participants, but it is not a requirement to do so.

Question 26

All of the following entry dates satisfy the statutory requirements of the IRC, EXCEPT:
• The eligibility requirements are one year of service and the attainment of age 21.

A. First day of the month following satisfaction of the eligibility requirements

B. First day of the calendar quarter following satisfaction of the eligibility requirements

C. First day of the plan year during which the eligibility requirements are satisfied

D. First day of the plan year following satisfaction of the eligibility requirements

E. First day of the plan year nearest satisfaction of the eligibility requirements

Answer 26

D. The statutory plan entry date is the earlier of:

• The first day of the plan year beginning after the employee satisfies the statutory age and service requirements; or
• Six months following the date the employee satisfies the statutory age and service requirements.

Entry on the first day of the plan year following satisfaction of the eligibility requirements will not satisfy the statutory entry requirements because the entry date could be more than six months following the date the employee satisfied the
eligibility requirements. For example, if Employee X completes the age and service requirements for a calendar year plan on March 30, 2012, the employee’s entry date would be January 1, 2013 which is more than six months after the
eligibility requirements were satisfied.

However, entry on the first day of the year during which eligibility requirements are satisfied would satisfy the statutory entry requirements by providing retroactive entry. For example, Employee X, who completed the age and service
requirements on March 30, 2012, would enter then plan on January 1, 2012 if the entry date is the first day of the year during which eligibility requirements are satisfied (2012).

Entry on the first day of the plan year nearest satisfaction of the eligibility requirements would satisfy the requirements by providing retroactive entry when needed. Under this scenario, Employee X’s entry date would also be January 1,
2012, because January 1, 2012 is nearer to March 30, 2012 than January 1, 2013. This definition is designed to provide retroactive entry only when prospective entry would be more than six months after the employee has satisfied the eligibility requirements. If Employee X had instead satisfied the age and service requirements on July 15, 2012, Employee X’s entry date would be January 1, 2013, because January 1, 2013 is nearer to July 15, 2012 than
January 1, 2012.