You can require employees to meet certain criteria before they can enroll in your 401(k) plan. This article explains how to set age and service requirements, which employee classes can be excluded, how rehired employees are handled, and how to troubleshoot eligibility issues.
You can require employees to meet certain criteria before they can enroll in your 401(k) plan. Eligibility requirements can be set during plan setup or updated at any time via a plan amendment.
Note: Eligibility requirements cannot be changed for Starter 401(k) plans. All employees age 18 and older need to be eligible for these plans.
When an amendment is made, affected participants will get an email notification about the change. An updated Summary Plan Description will also be available in the Documents section of their participant dashboard.
Gusto Retirement lets you set the following eligibility requirements.
Employees cannot participate until they reach a specified minimum age. Available options are 18, 19, 20, or 21.
Employees must satisfy your plan’s service requirement before they can participate. Gusto Retirement lets you measure service in one of two ways:
Elapsed time: Employees become eligible after completing a set period of employment. Available options are 3, 6, or 12 months.
Hours of service: Employees become eligible after working at least 1,000 hours during the applicable 12-month measurement period.
If your plan uses elapsed time, service is based on calendar time passed since the employee’s hire date. For example, if an employee is hired on January 1 and your plan has a 3-month service requirement, they become eligible on April 1. If your plan uses hours of service, service is based on tracked hours worked rather than calendar time since hire.
Important: Hours of service eligibility is only available for plans on the Enterprise tier.
In addition to age and service requirements, you can exclude certain classes of employees from participating.
At Gusto Retirement, the following classes are always excluded from plans:
Non-resident aliens with no US-sourced income — employees who are not permanent residents of the United States and whose income is not subject to US taxation
Residents of Puerto Rico — because Puerto Rican residents may not always have US-sourced income, they are excluded as a separate class to make sure the plan stays compliant
Union employees — to exclude union employees, their collectively bargained agreement needs to specifically state that retirement benefits were considered in negotiations. The agreement does not need to grant retirement benefits — it only needs to mention them. Check your collectively bargained agreement to confirm you are permitted to make this exclusion.
Leased employees — plans can include leased employees if they are paid the same way as your other employees.
Gusto Retirement requires all other W-2 employees to be treated equally for eligibility purposes. Part-time, seasonal, temporary, and any other named class of employees — other than those listed above — cannot be excluded from your plan.
If you have union, leased, non-resident alien, or Puerto Rico resident employees and are unsure whether they should be excluded, contact support. We can help explain these definitions, but we cannot determine whether specific employees should be excluded.
All service counts for 401(k) eligibility purposes. For plans using the elapsed time method — which applies to all Gusto Retirement plans — three general rules determine whether a rehired employee has met the service requirement.
If an employee was previously eligible to contribute deferrals — even if they never did — they generally re-enter the plan immediately upon being rehired.
All time worked for your company (and any legally related company) counts toward the service requirement.
Any period of severance shorter than 12 months also counts toward the service requirement. This means if an employee leaves and returns within 12 months, it is treated as if they never left. For example, if an employee quits and is rehired 11 months later, those 11 months count toward their service.
Periods of severance of 12 months or more generally do not count. For example, if an employee works for 6 months, leaves for 18 months, and is then rehired, they have accumulated only 6 months of service at the time of rehire.
Exception: The first year of parental leave does not count as a period of severance.
The rule of parity is the only circumstance under which a rehired employee may need to complete the service requirement again. Both of the following conditions need to be met:
Minimum break in service: If previously employed for five or fewer years, the employee needs at least five consecutive breaks in service (each defined as 12 months with no service). If previously employed for more than five years, the employee needs consecutive breaks in service for at least as many years as they were employed.
No vested interest: The employee needs to have had no vested interest in the plan — meaning they never deferred even $1 and got no vested employer contributions.
If both conditions are met, all prior service is disregarded, and the employee needs to restart service.
Note: If your plan has no service requirement, rehired employees generally enter the plan immediately after their rehire date.
How an eligibility change affects your employees depends on whether it makes eligibility less or more restrictive.
A change that makes eligibility less restrictive — like reducing a service requirement — takes effect immediately and applies to all employees as of the amendment date.
For example, if a plan had a 6-month service requirement and changes to immediate eligibility, all previously ineligible employees become eligible on the amendment's effective date (assuming they are not in an excluded class). These employees generally become participants on the next payroll date following that date.
Eligibility changes cannot be made retroactively.
A change that makes eligibility more restrictive can also be made at any time, but at Gusto Retirement it only applies to employees who were not yet eligible or had not yet passed an entry date before the amendment went into effect. Employees already participating in the plan remain eligible.
For example, if a plan is amended from 6 months of service to 12 months, an employee who was eligible and had passed an entry date before the change remains eligible. An employee who had not yet passed an entry date before the amendment would now need to meet the 12-month requirement.
If an employee shows as ineligible, here's how to find the cause and fix it.
The most common reasons an employee appears ineligible are:
They have not yet met the plan's minimum age requirement
They have not yet met the plan's length of service requirement
They fall into an excluded class — non-resident alien with no US-sourced income, resident of Puerto Rico, union employee, or leased employee
If you think an employee meets your plan's requirements but is showing as ineligible, update their hire date, date of birth, and/or compensation details in payroll.
Gusto or Gusto Embedded payroll: Changes sync to your 401(k) within 24 hours of being updated in payroll
Self-service plans: Update the employee's record directly in the Roster tab of your 401(k) administrator dashboard
To change your plan's age or service requirements, submit a retirement support ticket with “plan change” in the subject line. Plan changes can take up to 10 business days to process.
For new plans, any plan change or amendment will require a new plan document to be signed and may push back your plan's anticipated start date due to the 30-day enrollment notice requirement.