Do You Have to Offer a 401(k) to All Employees?

If you sponsor a 401(k), you do not have to offer it to every employee, but federal law tells you where the lines can be drawn. You can require workers to reach age 21 and complete a year of service, and you can exclude a handful of specific groups such as union employees covered by good-faith bargaining and nonresident aliens with no U.S.-source income. Everyone else who meets the plan’s eligibility conditions has to be allowed in, and even a technically legal exclusion can still fail if it tilts the plan toward highly paid workers. Offering the plan at all is voluntary under federal law; deciding who participates once you do is not.¹

The Minimum You Must Offer

Once a 401(k) exists, ERISA sets the outer limits of who can be kept out based on age and tenure. A plan cannot require an employee to be older than 21, and it cannot require more than one year of service, defined as 1,000 hours worked in a 12-month period.² Many plans stack both conditions, so an employee becomes eligible on whichever date comes later.

You can be more generous. You cannot be more restrictive. A plan that demands 22-year-olds only, or two years of service, is out of compliance from the start.

There is also a limit on how long you can make an otherwise-eligible worker wait to enter the plan. Once an employee satisfies the age and service conditions, the plan has to let them start participating no later than the earlier of six months after they qualify or the first day of the next plan year.¹

Part-Time Workers You Can No Longer Ignore

Part-time employees used to be a clean category to leave out. If they never crossed 1,000 hours in a year, they never got in. The SECURE Act and SECURE 2.0 changed that.

For plan years beginning in 2025, a 401(k) has to allow an employee to make elective deferrals once the employee has worked at least 500 hours in each of two consecutive 12-month periods and is at least 21. The rule is already in force for 2026 plan years.²³

What the rule requires is access to defer their own pay. Employer matching or non-elective contributions are not mandatory for this group unless the plan document promises them. Vesting also runs on a modified clock: each 12-month period with at least 500 hours counts as a year of vesting service, but only periods beginning on or after January 1, 2021 are counted.

Returning Service Members

The Uniformed Services Employment and Reemployment Rights Act (USERRA) treats a returning service member as if they never left for purposes of retirement plan eligibility and vesting. If your plan’s employer contributions depend on employee deferrals, you owe those contributions once the returning employee makes up their missed deferrals. The makeup window equals three times the length of the military service, capped at five years.⁴

Who You Can Legally Leave Out

Federal law names specific groups that a plan is allowed to exclude. The list is narrower than many owners assume.

Union Employees

Employees covered by a collective bargaining agreement can be excluded if retirement benefits were the subject of good-faith bargaining between the union and the employer.⁵ The theory is that those workers may already have retirement benefits negotiated separately, and forcing them into a parallel plan would cut across the bargaining process. If retirement benefits were never actually on the table, the exclusion does not apply.

Nonresident Aliens Without U.S.-Source Income

A nonresident alien employee who receives no earned income from U.S. sources can be excluded.⁵ For workers physically employed in the United States, this exclusion rarely comes up because their wages would generally count as U.S.-source income.⁶

Job Classifications

A plan can draw eligibility around objective job categories: salaried versus hourly, permanent versus temporary, one division versus another. Two constraints apply. The classification has to rest on genuine business criteria, not a list of specific people picked by name. And it cannot end up functioning as a way to favor higher-paid employees over rank-and-file workers, because it will be tested for exactly that.

The Controlled Group Trap

Owners of multiple businesses often assume they can offer a 401(k) at one company and skip it at another. Frequently they cannot. When businesses share enough common ownership, the IRS treats them as a single employer for retirement plan purposes.

A parent-subsidiary controlled group exists when one business owns at least 80% of another. A brother-sister controlled group exists when the same five or fewer owners hold at least 80% of each business with at least 50% identical ownership across them.⁷ Employees of every business in the controlled group get counted together for eligibility and nondiscrimination testing. Excluding the workforce of a commonly owned entity is one of the fastest ways to break a plan’s compliance.

Why “Technically Eligible” Isn’t Enough

Even a plan whose eligibility rules track federal minimums perfectly can still fail if the people actually benefiting skew toward highly compensated employees (HCEs). Every traditional 401(k) has to pass annual nondiscrimination testing to keep its tax-qualified status.⁸

For 2026, an HCE is anyone who owned more than 5% of the business at any time during the current or prior year, or who earned more than $160,000 from the employer in the prior year.⁹ Everyone else is a non-highly compensated employee (NHCE).

Two tests do the work. The Actual Deferral Percentage (ADP) test compares the average deferral rate of HCEs against NHCEs. The Actual Contribution Percentage (ACP) test does the same for employer matches and after-tax contributions. The permitted spread depends on how much the NHCEs are deferring:

NHCE average of 0–2%: HCE average can be up to twice the NHCE average.
NHCE average of 2–8%: HCE average can be up to the NHCE average plus 2 percentage points.
NHCE average above 8%: HCE average can be up to 1.25 times the NHCE average.

When a plan fails, the fix is uncomfortable: refund excess contributions to HCEs, which become taxable income to them, or make additional contributions to NHCE accounts. So the question of who you cover is not just legal on paper. It is also whether enough rank-and-file workers actually participate to keep the plan passing.

Safe Harbor as an Escape Hatch

A safe harbor 401(k) skips ADP and ACP testing altogether in exchange for a minimum employer contribution. Two common structures:

A safe harbor match: 100% of employee deferrals on the first 3% of compensation and 50% on the next 2%, or an enhanced version at least as generous. Matching cannot apply to deferrals exceeding 6% of compensation.¹⁰
A safe harbor non-elective contribution: at least 3% of every eligible employee’s compensation, whether or not the employee defers anything.

Safe harbor contributions have to vest immediately at 100%. For an employer whose workforce leans toward higher earners, the cost is often less painful than annual testing plus corrective distributions.

One Boundary Worth Knowing: Automatic Enrollment

If you are setting up a new plan rather than running an existing one, SECURE 2.0 adds a wrinkle. For plan years beginning after December 31, 2024, most newly established 401(k) plans have to include automatic enrollment: a default deferral rate of at least 3% but no more than 10% of compensation, escalating one percentage point per year to a floor of 10% and a ceiling of 15%. Employees can opt out or change their rate.¹¹ Plans adopted before December 29, 2022, employers with 10 or fewer workers, businesses under three years old, and SIMPLE 401(k), church, and governmental plans are all exempt. Excluding a worker from your plan does not exempt you from auto-enrolling everyone the plan does cover.

What Getting It Wrong Costs

Eligibility mistakes are among the most common 401(k) errors, and the IRS has built a system for fixing them. The Employee Plans Compliance Resolution System (EPCRS) lets employers self-correct many operational failures without filing anything or paying a fee.¹²

For a missed deferral opportunity, meaning you left out an employee who should have been let in, the standard correction is a corrective employer contribution equal to 50% of the deferral the employee would have made, adjusted for the earnings that money would have generated.¹³ If an employee would have deferred $4,000, the employer owes $2,000 plus earnings, from its own funds.

The worst outcome is disqualification. If the IRS finds the plan no longer meets the requirements for tax-favored treatment, the trust loses its tax-exempt status, employee contributions may become taxable, and the employer loses its deduction.¹⁴ Disqualification is rare because it hurts everyone at once, and the IRS generally prefers employers use EPCRS. Chronic or egregious violations still land there.

The practical takeaway on coverage: use the permitted exclusions if they fit your workforce, document the reasoning, run the controlled-group analysis before you assume a sister company is separate, and check that the people your plan actually covers can pass testing. Federal law gives you room to design who gets in. It also gives you a bill if you draw the lines wrong.

1
U.S. Department of Labor. FAQs About Retirement Plans and ERISA
2
Office of the Law Revision Counsel. 29 USC 1052 – Minimum Participation Standards
3
Internal Revenue Service. Long-Term Part-Time Employee Rules for Cash or Deferred Arrangements Under Section 401(k)
4
U.S. Department of Labor. Employers Pension Obligations to Reemployed Service Members Under USERRA
5
Office of the Law Revision Counsel. 26 USC 410 – Minimum Participation Standards
6
Internal Revenue Service. Nonresident Aliens – Exclusions From Income
7
Internal Revenue Service. Related Employers Phone Forum Presentation
8
Internal Revenue Service. 401(k) Plan Fix-It Guide – The Plan Failed the 401(k) ADP and ACP Nondiscrimination Tests
9
Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
10
eCFR. 26 CFR 1.401(m)-3 – Safe Harbor Requirements
11
Federal Register. Automatic Enrollment Requirements Under Section 414A
12
Internal Revenue Service. EPCRS Overview
13
Internal Revenue Service. Fixing Common Plan Mistakes – Correcting a Failure to Effect Employee Deferral Elections
14
Internal Revenue Service. Tax Consequences of Plan Disqualification