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Participant Eligibility

Participant eligibility can depend on restrictions in the Code and/or ERISA, and restrictions in the design of the plan.

In most cases, only employees are generally eligible to be included in the plan.  However, there are two possible exceptions: leased employees, and independent contractors.  In some plans, qualifying leased employees are required to be treated the same as common law employees, for certain plan purposes.  In other plans, they are not eligible to participate at all.  By contrast, independent contractors who are not employees of the sponsoring employer generally are excluded from plan eligibility, with one important exception.  That exception is a 457(b) plan, which can include both employees and independent contractors.

One important ERISA consideration that can affect participant eligibility applies to unfunded deferred compensation plans.  ERISA generally requires that assets be set aside for the exclusive benefit of the plan and plan participants.  Thus, ERISA plans generally are funded plans (though certain contribution may, for example, be subject to a vesting schedule).  As a general matter, an unfunded plan could not satisfy that requirement.  ERISA recognizes an exception for such plans, but only if participation in the plan is limited to a select group of management or highly compensated employees.  This group is referred to as a “top-hat group”, and the plans are referred to as “top hat plans.”  For top hat plans, participant eligibility must be narrow, since if eligibility is too broad it would create significant conflict between the plan’s status under the Code (which would require it to be unfunded) and its status under ERISA (which would require it to be funded).

Specific plan considerations:

  • 401(a)/401(k) plans: Qualifying leased employees must be included for certain purposes.  Independent contractors are not eligible to participate.
  • 403(b) plans: Neither leased employees nor independent contractors are eligible to participate.
  • 457(b) plans: Can be open to both common law employees and leased employees.