401(k) eligibility rules: who you have to cover
Eligibility is one of the few places where the law sets a ceiling rather than a floor. A plan can always be more generous than the rules. What it cannot do is be stricter than them — and one of those rules got stricter for employers in 2025.
A qualified plan may not require more than age 21 and one year of service before an employee can make salary deferrals. A two-year condition applies only to employer contributions, and only with immediate vesting.
Employers usually approach eligibility asking who they can exclude. The more useful question is what the maximum conditions are, because everything looser than that is a design choice you get to make — and because getting this wrong is one of the more common and more expensive plan errors to correct.
The ceiling on age and service
The IRS states that employees must generally be at least age 21 and have at least one year of service to participate in a qualified plan. Those are maximums. A plan may set age 18, or no age condition, or allow participation from the date of hire, and many do.
A plan may alternatively require two years of service — but if it does, the employee is immediately vested in their accrued benefit. And the two-year condition does not reach salary deferrals: the IRS is explicit that a 401(k) plan must allow an employee to participate by making elective deferral contributions after no more than one year of service.
So the two-year rule is narrower than it sounds. It can apply to employer contributions, and only in exchange for immediate vesting. Employee deferrals are capped at a one-year condition regardless. An employer who thinks they have a two-year waiting period for everything usually does not.
The long-term part-time rule, and what changed
Part-time employees who never meet a plan's ordinary service condition used to be excludable indefinitely. That is no longer true. An employee who becomes eligible solely by completing consecutive 12-month periods with at least 500 hours of service in each is a long-term, part-time employee, and must be allowed to make elective deferrals.
Section 125(c) of the SECURE 2.0 Act reduced the number of those periods from three to two, effective for plan years beginning after December 31, 2024. For plan years beginning before 2025 the count was three consecutive periods.
| Condition | Maximum a plan may require | The catch |
|---|---|---|
| Age | 21 | A plan may set a lower age or none at all. It may not set a higher one. |
| Service, for employee deferrals | 1 year | Cannot be extended to two years. This is the hard limit on deferrals. |
| Service, for employer contributions | 2 years | Only with immediate vesting in the accrued benefit. |
| Part-time employees | 2 consecutive 12-month periods with at least 500 hours each | For plan years beginning after 2024. It was three periods before that. Applies to elective deferrals. |
These are ceilings, not requirements. A plan is free to be more generous, and many small employers choose to be because tracking a waiting period is itself administrative work.
Two things the long-term part-time rule does not do
First, it does not apply to someone who was already eligible on another basis. The rule reaches an employee who becomes eligible solely by reason of completing those 500-hour periods. An employee who is immediately eligible on hire — because the plan has no service condition — is not a long-term part-time employee under this rule, because they did not get in that way.
Second, it does not apply under the elapsed time method. Where a plan measures eligibility by elapsed time rather than by actual hours completed in a 12-month period, an employee does not become eligible by completing 500-hour periods, so the rule has nothing to attach to.
Both of those are worth checking against your own plan document rather than assumed, because they turn on how your plan measures service — which is a choice made when the plan was written, often years earlier and often by someone else.
Entry dates are a separate question
Meeting the conditions and being able to participate are not the same moment. A plan sets entry dates — the points in the year at which someone who has met the conditions actually comes in. Monthly, quarterly and semi-annual entry dates are all common. The choice is a real trade: fewer entry dates mean less frequent onboarding work, and a longer wait for an employee who just qualified.
The practical failure here is not choosing badly. It is choosing a design and then not tracking against it — an employee crosses the threshold, the entry date passes, and nobody enrols them. That is a plan error requiring correction, and it is the most common reason eligibility becomes expensive.
Who you may still exclude
Eligibility conditions are not the only way employees end up outside a plan, and the other routes are more constrained than they look. Coverage and nondiscrimination requirements exist precisely so that a plan cannot be shaped to favour highly compensated employees — the IRS is direct that contributions or benefits must not discriminate in their favour. A plan that excludes a category of employee has to still pass those tests, which limits how much exclusion is actually available.
If you are considering excluding a group, treat it as a testing question rather than a drafting question, and get it checked before the plan year rather than after.
Common questions
What are the eligibility requirements for a 401(k)?
A qualified plan may generally require an employee to be at least age 21 and to have at least one year of service. Those are the most restrictive conditions permitted, not a requirement — a plan may be more generous, and many are. A plan may require two years of service for employer contributions only, and only if the employee is immediately vested.
Can a 401(k) have a two-year waiting period?
Only for employer contributions, and only with immediate vesting in the accrued benefit. It cannot apply to employee salary deferrals: the plan must allow an employee to participate by making elective deferral contributions after no more than one year of service.
Do part-time employees have to be allowed into a 401(k)?
An employee who becomes eligible solely by completing consecutive 12-month periods with at least 500 hours of service in each is a long-term part-time employee and must be allowed to make elective deferrals. SECURE 2.0 reduced the number of periods from three to two for plan years beginning after December 31, 2024.
Does the long-term part-time rule apply to every part-time employee?
No. It reaches only employees who become eligible solely by that route. Someone immediately eligible on hire is not covered by it, because they did not become eligible by completing 500-hour periods. It also does not apply where a plan measures eligibility using the elapsed time method.
What is an entry date?
The point in the plan year at which an employee who has met the eligibility conditions actually begins participating. Monthly, quarterly and semi-annual entry dates are all common. Fewer entry dates mean less frequent onboarding work and a longer wait for a newly qualified employee.
Sources
- Internal Revenue Service, Retirement Topics — Eligibility and Participation — the age 21 and one year of service conditions, and the two-year alternative with immediate vesting
- Internal Revenue Service, 401(k) Plan Qualification Requirements — that a plan must allow elective deferrals after no more than one year of service, and that contributions or benefits must not discriminate in favour of highly compensated employees
- Internal Revenue Service, Notice 2024-73 — Additional Guidance on Long-Term, Part-Time Employees — the two-consecutive-period rule effective for plan years beginning after 2024, the three-period rule before it, and the exclusions for employees eligible on another basis and for the elapsed time method
- Internal Revenue Service, Long-Term, Part-Time Employee Rules for Cash or Deferred Arrangements Under Section 401(k) — the regulatory detail behind the long-term part-time rules
- Internal Revenue Service, 401(k) Plan Overview — that an employer may not require more than one year of service as a condition of participation
aipep401k.com is a pooled employer plan for small business 401(k) plans, operated by ThinkNirvana Foundation — plan administration handled by automation rather than assembled by hand.
Related: how a 401(k) compares with a SIMPLE IRA, what sets the timeline for starting a plan. To see what a plan design would look like for your own headcount, the plan design tool is free and needs no sign-up.