Understanding the Difference Between Eligibility and Allocation Conditions

When it comes to interpretation of the plan document, many times I’m asked to, “Explain it in plain English.”  While of course the document is written in English, many technical terms or provisions leave even the most experienced people in the retirement industry scratching their heads.

Personally, I like to use analogies when explaining things ‘in plain English.”  It gives me the ability to compare the provision to something you are familiar with and already understand.  Two provisions that are commonly misunderstood and incorrectly used interchangeably are: Eligibility Requirements and Allocation Conditions.

In an Amusement Park

Eligibility Requirements are the initial requirements that have to be met to get into the Plan and Allocation Conditions are the on-going requirements that typically have to be achieved each Plan Year.

So, just like when you’re at the amusement park and you have to be a certain height to ride a lot of the rides, there is always a measuring stick outside the ride’s entrance.  If you’ve met the eligibility requirements (i.e. age 21 & 1 year of service) – you’re tall enough to ride and you’re allowed to enter.  But, how does Plan Entry Date fall into this analogy, you ask?  It’s easier for the amusement park employees (the Plan Administrators, TPA’s, etc.) to monitor the line and control the crowd in waves (aka Entry Dates).  Therefore, once your height has been measured and you’ve been deemed tall enough to ride, you will wait with all other newly eligible riders until its time for the next wave of riders to get in line for the ride.

Allocation Conditions

Now what about Allocation Conditions?  I see this as having to wait in line for the ride.  Typically, Plans will have a 1,000 hours and Last Day of the Plan Year requirement in order to be eligible for the employer contribution.  That equates to waiting in line for the ride, for what sometimes feels like a 1,000 hours on a hot summer day…and still being employed with the Employer on the last day of the Plan Year.  If you don’t meet the allocation conditions that year, say you only waited in line for 750 hours, you will have to continue to wait for the next available car (i.e. next Plan Year).  The good news is there is no need to go back to the gate and measure your height, because we already determined you were tall enough!

Conclusion

So, how does this analogy work if the plan has no allocation conditions?  That’s easy.  You measure your height (eligibility) and once you’re tall enough (i.e. age 21 & 1 year of service) and the next wave of riders has been approved to proceed to the ride, there’s no lines and no waiting after that!  Run to the ride and hop in a car because you’re getting a contribution every year until the Plan Sponsor stops the ride (i.e. doesn’t make a contribution for that year).

If you have any other questions about eligibility and allocation conditions, contact us today!