Plan sponsors can use this article to learn how Gusto Retirement determines eligibility, who becomes eligible to participate when you convert, and what you need to plan for before your conversion date. Three separate things can add participants at conversion, and they stack on top of each other. Read the first four sections together.
Gusto Retirement uses the “elapsed time” method to determine eligibility service. An employee satisfies a 1-year of service requirement after 12 months of employment, counted from their hire date. Hours worked during that time frame don’t affect it.
Many plans use the “hours of service” method instead. Under that method, an employee satisfies a 1-year of service requirement only if they work at least 1,000 hours during a 12-month period. An employee who never reaches 1,000 hours in any designated 12-month period never becomes eligible, no matter how long they stay employed.
Two other things to know about how this works at Gusto:
Your employees’ service before conversion counts. Elapsed time is measured from the original hire date, not from your conversion date. This is not a 12-month reset for your workforce.
We don’t customize eligibility. Unlike the vesting schedule, which we adjust at conversion, your eligibility requirement moves to elapsed time as written. You cannot keep an hours requirement for your existing employees and only apply elapsed time to new hires.
Gusto Retirement supports 4 service requirements. Your plan can require 0, 3, 6, or 12 months of service.
If your plan requires a number of months that is not on that list, we move it down to the closest number we do support. We always round down, never up. That means no employee waits longer at Gusto than they would have under your current plan, and some wait less.
This is a second reason your eligible group can grow at conversion, separate from the hours change. An employee who has been employed long enough to satisfy the shortened service requirement, but not long enough to satisfy your original one, becomes eligible when you convert.
Example: Your plan requires 4 months of service. At Gusto the service requirement becomes 3 months under the rounding down rule. Alderic was hired on September 15, 2025 and you convert to Gusto on January 1, 2026. Under your current plan he would have waited until February 15, 2026. At Gusto he has already satisfied the 3-month requirement, so he’s eligible on your conversion date.
Gusto Retirement uses a single service requirement for your whole plan. It applies to every contribution source, including employee deferrals, employer match, safe harbor contributions, and profit sharing. For example, we can’t set one service requirement for deferrals and a different one for profit sharing.
If your plan has different requirements today, we set the single requirement in three steps.
We take the shortest requirement across all of your contribution sources.
We round that number down to 0, 3, 6, or 12 months.
The result applies to every source.
Because we start from the shortest requirement, no employee waits longer for any contribution source than they would have under your current plan. For the sources that had a longer requirement, the wait gets shorter, and it can disappear entirely.
Example: Your plan requires 2 months of service for deferrals and 12 months of service for profit sharing. The shortest requirement is 2 months, and 2 months rounds down to 0. So your plan has no service requirement at all at Gusto, and it applies to both sources. Your profit sharing allocation now covers employees from their first day of employment instead of after a year.
Important: This is often the largest cost change at conversion, and it’s the one sponsors miss. A longer service requirement for profit sharing or employer match is usually there on purpose, to keep short-service and high-turnover employees out of receiving employer money. Collapsing everything to one shorter service requirement removes that. Before you convert, work out what your employer match and profit sharing cost will be when your whole eligible group is included.
Every employee who has been excluded from your plan solely because they did not work enough hours each year could become eligible to participate in the plan when you convert. If an employee has satisfied your plan’s service requirement when measured by elapsed time, and the only thing keeping them out previously was the hours threshold, that barrier goes away on your conversion date.
This is usually a bigger group than sponsors expect. It commonly includes part-time, temporary and seasonal employees, as well as on-call and variable-hour workers.
Read this section together with the two sections above. The hours removal, the round-down to an allowed number of months, and the collapse to one requirement for all sources are three separate changes. A single plan can be affected by all three at once, and the newly eligible group grows for each reason that applies.
The below examples cover the hours change only. They use a conversion date of January 1, 2026 and a plan with a 1-year of service requirement and a minimum age of 21.
Employee
Situation
Under your current plan
At Gusto on Jan 1, 2026
Donna
Part-time, hired March 2023, works about 15 hours a week and roughly 780 hours a year
Never eligible. She has never worked more than 1,000 hours in a 12-month eligibility period.
Eligible. She passed 12 months of employment in March 2024.
Wilfred
Variable-hour, hired September 2024, worked 950 hours in his first 12 months and about the same since
Not eligible. He came up 50 hours short in each 12-month eligibility period.
Eligible. He passed 12 months of employment in September 2025.
Sylvia
Hired August 2024, age 19, works full time
Not eligible because of her age.
Still not eligible. Your age 21 requirement doesn’t change. Will become eligible in the month she turns age 21 in 2026.
None of the changes in the examples above address the reasons other than service that keep an employee out of your plan. Employees below your plan’s minimum age stay out, and so do employees in a job classification your plan document excludes from participation.
When your vesting schedule moves to elapsed time, we shorten the schedule by 1 year for your existing participants. We do that because the change could otherwise leave a participant less vested than they were before, and federal law doesn’t allow a plan amendment to reduce a participant’s vested percentage.
Eligibility runs in the opposite direction. Moving from hours of service to elapsed time to measure service never takes eligibility away from any participant, because time-based service accumulates for every employee whether they work 5 hours a week or 50. Rounding a service requirement down works the same way, and so does taking the shortest requirement across your sources. All three changes only ever add participants to the plan, so there’s nothing to protect against and no adjustment to make.
That’s why the eligibility change isn’t something we can soften or phase in. The newly eligible group is simply eligible.
More eligible employees means more money moving through your plan. What that costs you depends on your plan design.
Employer contributions. If your plan includes an employer match, you will owe a match to every newly eligible employee who defers. If your plan has a safe harbor feature using a match or nonelective formula, you will owe those contributions to the newly eligible group on the same terms as everyone else. For a safe harbor nonelective feature, that means a contribution to all eligible employees whether or not they defer.
Profit sharing. If you make a profit sharing contribution, your allocation now covers a larger group. If profit sharing was subject to a longer service requirement than your other sources, this is where you see the biggest change.
Automatic enrollment. If your plan enrolls employees automatically, your newly eligible employees get swept in at your default deferral rate unless they opt out. Payroll deductions will start for a group you weren’t deducting from before.
Important: Sponsors are caught off guard by automatic enrollment more often than by anything else in this article. Work out the number of eligible employees you will have before your conversion date rather than after.
Adding eligible employees changes your testing results, and not always in the direction you’d guess.
Coverage testing usually gets easier. A larger group of eligible non-highly compensated employees generally helps your plan pass coverage. While all plans at Gusto Retirement are designed to pass coverage for elective deferrals and employer match, coverage testing can still be an issue if you choose to make a profit sharing contribution.
Deferral testing can get harder. If your plan isn’t a safe harbor plan, ADP testing compares the average of what your highly compensated employees defer against the average of what everyone else defers. Newly eligible employees who don’t defer count as 0% in that average, which pulls it down. That can lower the amount your highly compensated employees are allowed to defer, and can mean either refunds of excess deferrals to them after year end or additional contributions to non-highly compensated employees.
Cross-tested profit sharing needs a fresh look. If your profit sharing formula is subject to cross-testing, a shorter service requirement changes who is in your allocation groups, which changes your testing.
Long-term part-time tracking generally becomes unnecessary. Because eligibility no longer depends on an hours requirement, the separate rules for long-term part-time employees generally won’t add anyone who isn’t already eligible under your plan.
Note: If your plan is a safe harbor plan, deferral testing doesn’t apply to you, and this section is mostly about coverage and profit sharing.
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.