Determining ESOP Employees’ Date of Participation

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Wed, Feb 06, 2013
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If you are a December 31st plan year end, you may have, or soon will be collecting your 2012 employee payroll information and computing new participants for the ESOP.  Your plan document defines the eligibility requirements for your plan, but do you know what entry dates are used in your plan?

Statutory Requirements

Age and Service

Most ESOPs, like other qualified retirement plans, have age and service eligibility requirements before an employee can participate in the plan.  There are limits to the eligibility requirements a plan can impose on an employee.  The minimum age and service conditions under IRC Section 410(a)(1)(A) state the age requirement cannot exceed the age of 21 and the service requirement cannot exceed 1 year of service (1,000 hours in 12 months).  A plan can establish 2 years of service for eligibility for the ESOP, but this provision is not commonly used as the participant must be immediately vested in their account.   

Entry Dates

After an employee has met the eligibility requirements, the plan document will indicate the entry dates an employee becomes a participant in the ESOP.  As with the age and service requirements, there are limits on the time an employee can wait before commencing participation in the plan.  IRC Section 410(a)(4) - Time of participation states an employee must enter the ESOP no later than the earlier of (a) the first day of the plan year which begins after the date the employee completes the statutory age and service requirements, or (b) six months following the date the employee completes the statutory age and service requirements. 

As a result, it is very common to see plans with two entry dates, one being the first day of the plan year and the other date being the first day of the seventh month of the plan year.  With two entry dates, having employees begin participation in the plan in the next entry date upon completion of the plan eligibility requirements will satisfy the legal requirements.

Plan Requirements

It is critical to know what your eligibility provisions are for your ESOP, as your requirements may be more liberal than the legal limits.  For example, your ESOP document may have an age of 18 and 6 months of service requirement, and quarterly entry dates to enter the plan.  You should also make sure your SPD portrays the same requirements as your plan document.  Not following the provisions in your ESOP document is an operational failure that would need to be corrected under The Employee Plans Compliance Resolution System (EPCRS).

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Topics: Compliance, ESOP Administration, Plan Document

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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