Why can employees under 21 enroll in 401(k) plans?

Question

There are certain requirements on 401(k) plans, namely that employees must be eligible if:

• At least age 21 and
• Have at least 1 year of service

It looks like those under age 21 can be excluded by companies but are not necessarily required to be excluded.

However, I cannot find any official information indicating where employees under age 21 (or those with less than 1 year service) are eligible for 401(k) plans. I am almost positive this is possible, however, other than an inference from the second link, I cannot point to anything official discussing the requirements for such a situation.

• What documentation provides allowance for employees under age 21 to be enrolled in 401(k) plans?

Answer 1

Some do exist that allow people under age 21 to enroll The IRS a few years ago reviewed 401K plans for compliance here is what they found:

Age and Service Eligibility Requirements to Make Elective Deferral Contributions

A section 401(k) plan may require that an employee meet specified age and/or service requirements to be eligible to participate in the cash or deferred arrangement. Code section 401(k)(2)(D) provides that such requirements may not exceed age 21 and one year of service. Figure 2 shows the percentage of section 401(k) plans that utilize various age requirements for eligibility to make elective deferral and other employee contributions.

> Figure 2. Age Requirements for Participation 

> Age Requirement    Plans

> None           20% 
> 18 years       13% 
> 19-20 years     4% 
> 21 years       64%

Answer 2

Laws are generally rules of exclusion, not rules of inclusion. Meaning, you can do anything you want as long as there is no law that says you can't.

Laws exclude things from being legal, it's very rare for there to exist a law that proactively legalizes something. Typically when something is "legalized" it means that there was a law written to rescind a former law that made something illegal.

While a 401(k) is really a section of the tax code and not exactly the same as a law, the same sort of mentality exists. The IRS will allow certain tax deferrals within some kind of criteria in this case code section 401 subsection k. So in your searching you found that the rules for a 401(k) plan forbid certain exclusions from being placed on participants. Exclusions can be placed on employees but not they've had a year of service and are over age 21.

Employees under age 21 are eligible for 401(k) plans unless the plan excludes them. You'd have to talk to your plan administrator to find out if you're excluded from eligibility. If you are, you can just open yourself an IRA and have a substantially similar tax preferred savings account, though at 21 you should probably be more concerned about more current savings needs than retirement.

Answer 3

Companies in the US are not required to provide a retirement plan. They do it for tax reasons, to be able to attract talent, and for various non-monetary reasons (e.g. company leadership believes in taking care of their people.) The company wants to provide the retirement plan as a 401(k) because it is attractive to potential employees for tax reasons.

These requirements you're looking at cover the minimums that the company must provide if they wish to provide a retirement savings plan, and to have that plan be a 401(k) plan.

At the same time, companies want to avoid people taking a position and working for a year, capturing a bunch of retirement benefits then jumping ship. So if you can begin matching on day 1, and there's no vesting period, a person could capture all that matching for a year, leave, withdraw the money, pay the penalty and taxes and still end up at a 40% profit +/- gains.

Establishing a maximum allowed for minimum starting age is just the IRS preventing companies from discriminating against younger employees. Establishing a maximum allowed for minimum time onboard before starting prevents companies from setting these too high as well.

From personal experience, I've never worked for a company with a minimum age for contributing, and never seen a plan that you couldn't start on the first check after the paperwork is processed. I've also never seen one with less than a one year vesting period.

Answer 4

Internal Revenue Code Section 410(a)(1)(A) states:

(A) General rule. A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part requires, as a condition of participation in the plan, that an employee complete a period of service with the employer or employers maintaining the plan extending beyond the later of the following dates—

(i) the date on which the employee attains the age of 21; or

(ii) the date on which he completes 1 year of service.

In general, IRC 410 defines "Minimum Participation Standards".