What Is a 401(k) Employer Eligibility Failure?

A 401(k) employer eligibility failure means the problem is the employer, not the employee: the sponsor established a 401(k) cash-or-deferred feature even though federal law did not permit that employer to maintain it.^[1]

That is a distinct EPCRS failure category.

It is not:

• an employee who entered too early
• a worker who should have been excluded
• a bad match calculation
• a failed ADP test
• a missing amendment.

Those are different problems.

Employer eligibility asks a more basic question:

Was this sponsor legally allowed to maintain a 401(k) cash-or-deferred arrangement at all?

The Formal EPCRS Definition

Revenue Procedure 2021-30 defines an employer eligibility failure as:

the adoption of a plan intended to include a qualified cash or deferred arrangement under Section 401(k) by an employer that fails the employer eligibility requirements to establish a 401(k) plan.^[1]

EPCRS expressly says the failure is not:

• plan document
• operational
• demographic.^[1]

The classification matters because the correction is different.

This Is Uncommon for an Ordinary Private Employer

A standard private taxable corporation, partnership or other business employer generally does not face the classic:

"you are not allowed to have a 401(k)"

problem merely because of its tax status.

Private employers still have to satisfy:

• plan qualification
• eligibility
• coverage
• nondiscrimination
• contribution limits
• vesting
• distribution
• fiduciary rules.

But those are not employer eligibility failures.

That distinction keeps this article narrow.

The Main Modern 401(k) Example Is Government

IRS guidance identifies a common employer eligibility failure as:

a governmental employer adopting a 401(k) plan.^[5][8]

Section 401(k)(4)(B)(ii) generally provides that a cash or deferred arrangement is not a qualified cash or deferred arrangement if it is part of a plan maintained by:

• a state
• local government
• political subdivision
• agency or instrumentality of one of those entities.^[3]

That general prohibition has important exceptions.

The exceptions must be checked before anyone calls the plan invalid.

Do Not Read "Government" as "Never Eligible"

Three major qualifications matter.

1. Grandfathered governmental arrangements

Certain governmental cash or deferred arrangements adopted before:

May 6, 1986

receive statutory transition protection.^[3][8]

2. Rural cooperative plans

Section 401(k)(4)(B)(ii) expressly excludes a rural cooperative plan from the general governmental prohibition.^[3]

3. Indian tribal governments

Section 401(k)(4)(B)(iii) provides a separate rule allowing specified Indian tribal governmental employers and related entities to maintain a 401(k) cash-or-deferred feature.^[3][9]

So:

governmental = ineligible

is too crude.

Example: City Establishes a New 401(k)

Assume a city establishes a new 401(k) arrangement in:

2024

No grandfathering applies.

The plan is not a rural cooperative plan.

The employer is not within the Indian tribal government rule.

The city can have an employer eligibility failure because Section 401(k)(4)(B)(ii) generally prevents that state or local governmental arrangement from being a qualified cash or deferred arrangement.^[3]

The problem exists even if:

• the document was drafted correctly for a private employer
• employees were enrolled correctly
• deferrals were deposited on time
• ADP testing was performed correctly.

Administration cannot cure employer ineligibility.

A Valid-Looking Document Does Not Solve the Sponsor Problem

Suppose a governmental entity signs a pre-approved 401(k) adoption agreement.

The document provider issues all standard materials.

The recordkeeper opens accounts.

Payroll begins deductions.

None of those facts establishes employer eligibility.

A pre-approved plan document can answer:

Is this form capable of satisfying qualification requirements when adopted by an eligible employer?

It does not necessarily answer:

Is this particular employer legally eligible to use the 401(k) feature?

Grandfathered Governmental Plans Need Historical Research

A governmental employer discovers an old 401(k).

The current plan document says:

Restated 2023

That date tells almost nothing about grandfathering.

The relevant history can go back to whether a cash or deferred arrangement was adopted before:

May 6, 1986.^[3][8]

The transition rules can also treat later arrangements of a qualifying governmental unit favorably under specified circumstances.^[3]

So the correct investigation is historical.

Collect:

• original plan
• original adoption date
• earliest cash-or-deferred provision
• amendments
• restatements
• predecessor plans
• mergers
• governmental-unit history
• collective bargaining history where relevant.

Do not infer loss of grandfathering from a modern restatement date.

Restatement Is Not New Adoption for Every Purpose

Qualified plans are restated repeatedly.

A grandfathered arrangement can have:

• later restatements
• amendments
• vendor changes
• recordkeeper changes

without automatically becoming a newly created cash or deferred arrangement.

The legal question is not:

When was the latest document signed?

It is:

What arrangement existed, for which governmental unit, and when was the relevant cash-or-deferred arrangement originally adopted?

That can require counsel.

Indian Tribal Governments Have a Separate Rule

Section 401(k)(4)(B)(iii) allows an employer that is:

• an Indian tribal government
• a subdivision of an Indian tribal government
• an agency or instrumentality of either
• certain corporations owned in whole or part by those entities

to maintain a qualified 401(k) cash-or-deferred feature as part of a plan.^[3]

IRS tribal-government guidance also distinguishes:

• governmental activities
• commercial activities

for purposes of governmental-plan status under Section 414(d).^[9]

The point for employer eligibility is straightforward:

do not apply the state-and-local-government prohibition to a tribal employer without reading clause (iii).

Congress wrote a separate rule.

Tax-Exempt Employers Are Generally Eligible Today

Section 401(k)(4)(B)(i) says, subject to the governmental rule, an organization exempt from tax under the Code may include a qualified cash or deferred arrangement in a plan.^[3]

That means a:

• 501(c)(3)
• trade association
• union
• other tax-exempt organization

is not generally barred from maintaining a 401(k) merely because it is tax-exempt.

This was not always true.

Why Old IRS Materials Mention Tax-Exempt Employer Failures

The law historically restricted tax-exempt organizations from establishing 401(k) arrangements.

The restriction was removed for years after 1996.

IRS internal guidance therefore identifies historical employer eligibility failures involving tax-exempt employers during the earlier prohibited period.^[8]

This creates an important 2026 distinction:

historical failure

does not necessarily mean:

current ineligibility.

Revenue Procedure 2021-30 Expressly Recognizes That Distinction

The standard correction for an employer eligibility failure is cessation of contributions.^[1]

But Revenue Procedure 2021-30 says cessation is not required when continued contributions would:

no longer create an employer eligibility failure.^[1]

It gives the example of a tax-exempt employer that may maintain a 401(k) plan after 1996.^[1]

That means correction should be tied to current legal eligibility.

Not mechanically copied from an old checklist.

Employer Eligibility Failure vs. Employee Eligibility Failure

These phrases sound similar but mean very different things.

Employer eligibility failure

The sponsor itself was not permitted to establish the 401(k) arrangement.

Employee eligibility failure

An individual employee:

• entered too early
• entered too late
• was excluded incorrectly
• was included incorrectly.

Employee participation errors are generally:

operational failures

when the plan failed to follow valid eligibility terms.

INV-111 and INV-097 cover those issues.

Employer Eligibility Failure vs. Controlled-Group Failure

Assume a parent corporation has two subsidiaries.

The sponsor incorrectly ignores one company when testing coverage.

That can create:

• coverage failure
• operational failure
• demographic failure

depending on the facts.

It does not ordinarily mean the employer was prohibited from having a 401(k).

INV-090 covers controlled groups.

The statutory employer population and employer eligibility are separate questions.

Employer Eligibility Failure vs. Plan Document Failure

Suppose a city adopts a beautifully drafted 401(k) plan in 2025.

The written terms themselves could be perfectly compliant for an eligible private employer.

The problem is not necessarily the words.

The city is generally not eligible to maintain the qualified cash or deferred arrangement.

That is:

employer eligibility failure.

Contrast:

A private corporation has a 401(k) document missing a required qualification provision.

The employer is eligible.

The document is defective.

That is:

plan document failure.

INV-112 covers the second problem.

Employer Eligibility Failure vs. Demographic Failure

Suppose a private employer's 401(k) covers too many HCEs relative to NHCEs and fails Section 410(b).

The employer is allowed to sponsor a 401(k).

The benefiting population is discriminatory.

That is generally:

demographic failure

when it fits the EPCRS definition.

INV-113 covers that category.

The Correction Is Different Because the Problem Is Structural

For an ordinary operational failure, correction often means:

• contribute money
• restore earnings
• rerun testing.

For employer eligibility failure, continuing the arrangement can perpetuate the failure.

That is why Revenue Procedure 2021-30 begins with:

stop contributions.^[1]

The correction removes the prohibited ongoing feature.

The Standard Correction: Stop All Contributions

Revenue Procedure 2021-30 states that the permitted correction for employer eligibility failure is:

cessation of all contributions.^[1]

That includes:

• elective deferrals
• after-tax employee contributions.

IRS Form 14568-F goes further in the model VCP statement for a 401(k) employer eligibility failure:

• all contributions cease
• no new employee contributions
• no new employer contributions.^[6]

This is not a correction where payroll merely changes one percentage.

The contribution stream itself stops.

The Six-Month Rule Is Not Permission to Wait Six Months

SECURE 2.0 materially changed SCP.

Under Revenue Procedure 2021-30 alone, employer eligibility failures were not eligible for SCP.^[2]

Notice 2023-43 removes that blanket prohibition for an:

eligible inadvertent failure.^[2]

But employer eligibility failures receive a special timing rule.

Notice 2023-43 says self-correction is treated as completed within a reasonable period only if the sponsor:

ceases all contributions as soon as reasonably practicable after identifying the failure

and, in all events, no later than:

the last day of the sixth month following identification.^[2]

The first phrase matters more than the second.

Example: Failure Identified March 12

Employer identifies a true employer eligibility failure:

March 12, 2026

The sponsor can stop payroll deferrals beginning:

April 1

but chooses to continue contributions until September because six months have not elapsed.

That is weak analysis.

Notice 2023-43 does not create a six-month contribution holiday.

It requires cessation:

as soon as reasonably practicable.^[2]

The six-month date is an outside benchmark for deemed reasonable-period treatment.

Calculating the Six-Month Outside Date

Assume identification:

March 12, 2026

Sixth month following March:

September 2026

Outside benchmark:

September 30, 2026

But if the sponsor could reasonably stop contributions on:

April 1

waiting until September 30 is not justified merely because it fits the outer date.

Document:

• identification date
• first feasible payroll change date
• date employee deductions stopped
• date employer contributions stopped
• reason for any delay.

Do Not Stop Contributions Before Confirming the Failure

The rule works in both directions.

A state agency discovers an old governmental 401(k).

Someone says:

"Governmental 401(k)s are illegal. Stop payroll today."

That can be wrong if:

• the arrangement is grandfathered
• a rural cooperative exception applies
• a tribal rule applies
• the sponsor classification is not what it appears to be.

Stopping legitimate participant deferrals can itself create:

• missed deferral problems
• missed match
• employee relations issues
• operational failures.

Classify first.

Then move quickly.

The Existing Assets Do Not Simply Get Paid Out

IRS Form 14568-F provides a model VCP correction for 401(k) employer eligibility failure.^[6]

After contributions cease:

existing assets remain in the trust, annuity contract or custodial account

and are distributed no earlier than a permitted event under Section 401(k).^[6]

That is a critical point.

The model correction is not:

terminate the arrangement and send everyone a check tomorrow.

Why Immediate Distribution Is a Bad Assumption

401(k) money is subject to statutory distribution restrictions.

A correction should not solve employer ineligibility by creating:

impermissible early distributions.

The plan may need to become:

• frozen to new contributions
• maintained for existing balances
• administered under applicable distribution rules.

Participants can therefore have a plan that:

no longer receives money

but:

continues holding existing retirement assets.

Example: New City 401(k)

City establishes non-grandfathered 401(k):

January 1, 2025

Failure discovered:

July 2026

Assume no exception applies.

Correction analysis:

1. confirm city is a governmental employer under the applicable rule
2. confirm no grandfathering
3. confirm no rural cooperative or tribal exception
4. document failure period
5. stop elective deferrals
6. stop employer contributions
7. preserve existing assets
8. continue distributions only under permitted rules
9. document SECURE 2.0 SCP eligibility or file VCP
10. implement governance controls preventing another ineligible plan adoption.

The correction does not erase the accounts.

VCP Still Matters After SECURE 2.0

Notice 2023-43 permits self-correction of eligible inadvertent employer eligibility failures by removing the old categorical SCP prohibition.^[2]

That does not make SCP mandatory.

VCP remains available.^[2]

For employer eligibility problems, formal IRS approval can be valuable because the classification can turn on:

• governmental status
• agency or instrumentality status
• grandfathering
• predecessor history
• statutory exception
• transaction history.

A wrong SCP conclusion can be expensive.

Form 14568-F Is Built for This Failure

The IRS continues to list:

Form 14568-F — Model VCP Compliance Statement, Schedule 6, Employer Eligibility Failure

for:

• 401(k)
• 403(b)

plans.^[6][7]

For a 401(k), the form asks the sponsor to describe why it was ineligible and states the model correction:

1. cease all contributions
2. permit no new employee or employer contributions
3. retain existing assets until a Section 401(k) permitted distribution event.^[6]

That model is useful even when assessing SCP because it shows the IRS's established correction architecture.

VCP Filing Does Not Permit Contributions to Continue Indefinitely

Revenue Procedure 2021-30 says that for a VCP submission:

cessation must occur no later than the date the VCP submission is filed.^[1]

Notice 2023-43 can demand even faster action for SCP because it says:

as soon as reasonably practicable.^[2]

A sponsor should not choose VCP as a reason to keep payroll running longer.

Historical Tax-Exempt Example

Assume a tax-exempt organization adopted a 401(k) during a historical period when the law prohibited the arrangement.

That creates a historical employer eligibility failure.

Today the organization is legally eligible under current Section 401(k)(4)(B)(i).^[3]

Revenue Procedure 2021-30 specifically says contribution cessation is not required if continuing contributions would not create an employer eligibility failure and cites post-1996 tax-exempt eligibility as an example.^[1]

So the correction might address:

the historical defect

without freezing a currently lawful plan.

That is exactly why current eligibility must be separated from past eligibility.

Public-Private Transactions Need an Eligibility Review

A private company maintains a 401(k).

A state or local governmental entity acquires the business.

The transaction team focuses on:

• payroll
• benefits conversion
• recordkeeper transition
• employee communications.

The more basic question can be:

Who will legally maintain the cash or deferred arrangement after closing?

If the governmental entity becomes the sponsor or assumes the arrangement, Section 401(k)(4)(B) must be analyzed before contributions continue.

Do not wait for the first post-closing compliance test.

Example: Government Buys Private Employer

Private Company A has:

• 1,000 employees
• active 401(k)
• $150 million in assets.

A public authority acquires Company A.

The deal documents state:

401(k) will continue unchanged.

That sentence is not enough.

The benefits team needs to determine:

• who is the post-closing employer
• whether the plan remains maintained by an eligible employer
• whether the acquired business retains a separate non-governmental employer status
• whether Section 414(d) governmental-plan characterization changes
• whether a statutory exception applies.

A billion-dollar transaction can create a qualification problem with one sentence in a benefits schedule.

Indian Tribal Transactions Require Their Own Analysis

A tribal government can be eligible under Section 401(k)(4)(B)(iii).^[3]

But IRS guidance also distinguishes governmental and commercial tribal activities for Section 414(d).^[9]

That means a tribal enterprise should not simply copy:

state-government answer

or:

private-company answer.

The statutory employer and covered employee population matter.

Rural Cooperative Plans Are a Narrow Exception

Section 401(k)(4)(B)(ii) says the governmental prohibition does not apply to:

a rural cooperative plan.^[3]

This is not a generic exception for:

• rural employers
• municipal utilities
• agricultural businesses.

The arrangement has to satisfy the statutory definition applicable to a rural cooperative plan.

Do not turn a narrow Code term into a broad geographic exemption.

Employer Eligibility Is Separate From Governmental-Plan Status

A plan can implicate both:

• Section 401(k)(4)(B)
• Section 414(d).

Section 414(d) defines governmental plan status.

Section 401(k)(4)(B) governs eligibility to maintain a qualified cash or deferred arrangement.

The questions overlap.

They are not identical.

For tribal governments especially, the distinction matters because Section 401(k)(4)(B)(iii) supplies a specific rule.

The Plan Can Have More Than One Failure

Assume an ineligible governmental employer maintains a 401(k) for five years.

During that time the plan also:

• excludes eligible employees
• uses wrong compensation
• fails Section 415
• makes improper distributions.

Employer eligibility failure does not absorb every other problem.

The correction file may need separate workstreams for:

• employer eligibility
• operational failures
• excess amounts
• distributions
• testing
• tax reporting.

EPCRS classification is not a contest where one label wins.

Stopping Contributions Can Create a New Employee-Relations Problem

A sponsor that stops deferrals needs a communication plan.

Employees may ask:

• Why did deductions stop?
• Is my existing money safe?
• Can I roll it out?
• Will the employer replace lost contributions elsewhere?
• Is the plan terminated?
• Can I access the balance now?

The legally correct answers depend on:

• plan status
• distribution provisions
• correction route
• alternative retirement arrangement.

Do not promise:

immediate rollover availability

if the participant has no permitted distributable event.

A Replacement Plan Needs Separate Analysis

An ineligible governmental employer may decide to use a different retirement arrangement going forward.

Possibilities can include, depending on employer type and law:

• governmental 457(b)
• 403(b) for qualifying public educational employers
• pension arrangement
• other governmental plan structure.

The employer should not simply convert the old 401(k) label into:

457

and keep the same payroll and assets.

Different plans have different:

• statutes
• contribution limits
• distribution rules
• trust rules
• amendment requirements.

Correct the old plan first.

Design the replacement separately.

Existing 401(k) Assets Do Not Automatically Become 457(b) Assets

Suppose a city freezes an ineligible 401(k) and establishes a governmental 457(b).

The city cannot assume participant 401(k) balances can simply be journaled into the new 457(b) arrangement.

Any transfer or rollover needs an independent legal basis.

The correction under Form 14568-F specifically contemplates existing assets remaining in the old plan until a permitted Section 401(k) event.^[6]

That is a strong warning against informal asset migration.

SCP Requires an Eligible Inadvertent Failure

Notice 2023-43 removes Revenue Procedure 2021-30's categorical ban on SCP for employer eligibility failures.^[2]

The sponsor still has to satisfy the broader eligible-inadvertent-failure framework.

That includes showing the failure occurred despite:

established practices and procedures

reasonably designed to promote compliance.^[2]

For employer eligibility, relevant controls can include:

• sponsor-entity classification review
• benefits counsel signoff on plan adoption
• M&A retirement-plan checklist
• governmental-status analysis
• predecessor-plan history
• grandfathering file
• plan-type authorization matrix.

A sponsor that never asked whether it could legally adopt the plan has a harder narrative than one that had a documented review process and made a reasonable but mistaken classification.

Egregious or Abusive Facts Can Block SCP

Eligible inadvertent failure does not include failures that are:

• egregious
• related to diversion or misuse of plan assets
• directly or indirectly related to an abusive tax-avoidance transaction.^[2]

A sponsor should not assume:

ineligible employer = automatically inadvertent.

The facts still matter.

Examination Can Cut Off SCP

Under Notice 2023-43, once the plan or plan sponsor comes under examination, an eligible inadvertent failure generally can no longer begin self-correction unless the sponsor had already demonstrated a:

specific commitment to implement correction.^[2]

For employer eligibility, strong evidence can include:

• legal eligibility analysis completed
• board or committee resolution
• payroll stop instructions issued
• contribution cessation date scheduled
• recordkeeper freeze process opened
• correction memo drafted.

An email saying:

"we may have a problem"

is not the same thing.

The Special Timing Rule Rewards Fast Classification

Most eligible inadvertent failures receive an 18-month deemed-reasonable correction benchmark under Notice 2023-43.^[2]

Employer eligibility failure does not.

It receives:

as soon as reasonably practicable

and:

no later than the last day of the sixth month after identification.^[2]

That shorter period reflects the nature of the failure.

Every new contribution can continue the prohibited arrangement.

SCP vs. VCP

SCP is less expensive.

VCP gives formal IRS review.

Audit CAP Is the Weakest Position

If the IRS discovers an employer eligibility failure during examination and SCP is unavailable, Audit CAP can become the correction route.

The sponsor can face:

• contribution cessation
• plan administration work
• participant communication
• correction of overlapping failures
• professional fees
• negotiated sanction.

IRS Audit CAP factors expressly consider whether the failure is an employer eligibility failure.^[4]

This is a failure category worth resolving before examination.

A Five-Part Employer Eligibility File

1. Employer classification

Document:

• legal entity
• tax status
• governmental status
• political subdivision status
• agency/instrumentality analysis
• tribal status
• rural cooperative status.

2. Plan history

Document:

• initial adoption
• first cash-or-deferred arrangement
• grandfathering facts
• amendments
• predecessor plans
• mergers.

3. Failure period

Identify:

• first date employer was ineligible
• dates contributions occurred
• date eligibility changed, if any.

4. Correction

Document:

• identification date
• cessation decision
• final employee deferral payroll
• final employer contribution
• recordkeeper freeze
• asset-retention treatment
• SCP or VCP authority.

5. Prevention

Add:

• sponsor-status review before future plan adoption
• M&A benefits checklist
• counsel approval for governmental plan type
• grandfathered-plan archive.

The file should prove:

why the employer was ineligible, for what period, and why the selected correction is valid.

Frequently Asked Questions

What is a 401(k) employer eligibility failure?

It occurs when an employer establishes a Section 401(k) cash-or-deferred feature even though the sponsor does not satisfy the employer-level requirements for maintaining that arrangement.^[1]

Is this the same as an employee being ineligible?

No.

Employee eligibility errors are generally operational failures.

Employer eligibility failure concerns the legal status of the plan sponsor.

Can a private company sponsor a 401(k)?

Generally yes, assuming the arrangement otherwise satisfies the qualification requirements.

The classic 401(k) employer eligibility restriction is not aimed at ordinary private employers.

Can a tax-exempt organization sponsor a 401(k)?

Generally yes under current Section 401(k)(4)(B)(i), subject to the normal qualification rules and the separate governmental restriction.^[3]

Can a city sponsor a new 401(k)?

State and local governments, political subdivisions and their agencies or instrumentalities generally may not maintain a qualified cash or deferred arrangement under Section 401(k)(4)(B)(ii), subject to statutory exceptions and grandfathering.^[3]

Are all governmental 401(k)s invalid?

No.

Grandfathered arrangements, rural cooperative plans and Indian tribal government arrangements can fall outside the general prohibition.^[3][8][9]

What is the grandfather date?

The statutory transition rule protects specified state and local governmental cash or deferred arrangements adopted before May 6, 1986.^[3]

Can an Indian tribal government maintain a 401(k)?

Section 401(k)(4)(B)(iii) permits specified Indian tribal governmental employers and related entities to maintain a qualified 401(k) cash-or-deferred feature.^[3]

What is the correction?

Revenue Procedure 2021-30 generally requires cessation of all contributions, including elective deferrals and after-tax employee contributions.^[1]

What happens to money already in the plan?

IRS Form 14568-F's model correction states that assets remain in the trust, annuity contract or custodial account and are distributed no earlier than a permitted Section 401(k) event.^[6]

Does everyone get an immediate distribution?

No.

The IRS model correction specifically preserves the assets until a permitted Section 401(k) distribution event.^[6]

Can an employer eligibility failure use SCP?

Potentially.

Notice 2023-43 removed Revenue Procedure 2021-30's blanket SCP prohibition for an employer eligibility failure that qualifies as an eligible inadvertent failure.^[2]

How quickly must contributions stop under SCP?

As soon as reasonably practicable after the failure is identified and, for deemed reasonable-period treatment, no later than the last day of the sixth month following identification.^[2]

Does that mean the employer has six months to keep contributing?

No.

The rule says:

as soon as reasonably practicable.

Six months is the outside benchmark, not a grace period.^[2]

Can the employer still use VCP?

Yes.

Notice 2023-43 expressly preserves VCP for eligible inadvertent failures, and Form 14568-F is the IRS model VCP schedule for 401(k) and 403(b) employer eligibility failures.^[2][6][7]

What if the employer is eligible today but was not eligible historically?

Revenue Procedure 2021-30 says cessation is not required if continuing contributions would no longer create an employer eligibility failure, and gives a post-1996 tax-exempt employer as an example.^[1]

The ROIStreet Employer Eligibility Test

Use this sequence:

Who is the legal plan sponsor? → private, tax-exempt, state/local government, rural cooperative or tribal employer? → does Section 401(k)(4)(B) permit the arrangement? → if governmental, does grandfathering apply? → identify any predecessor or transaction history → define the actual failure period → determine whether the employer is eligible today → if failure continues, stop contributions as soon as reasonably practicable → preserve existing assets under Section 401(k) distribution restrictions → apply Notice 2023-43 SCP conditions or file VCP → correct overlapping operational/document/testing failures separately → preserve the historical eligibility file

The dangerous shortcut is:

"Government employers cannot have 401(k)s."

The statute is more precise.

Employer eligibility failure is rare precisely because most sponsors are eligible. When it does occur, the first job is not recalculating participant accounts—it is proving whether the sponsor was legally entitled to maintain the cash-or-deferred arrangement in the first place.

Sources & References

1. Internal Revenue Service: Revenue Procedure 2021-30 — Employee Plans Compliance Resolution System — https://www.irs.gov/irb/2021-31_IRB
2. Internal Revenue Service: Notice 2023-43 — SECURE 2.0 Expansion of EPCRS — https://www.irs.gov/irb/2023-24_IRB
3. Legal Information Institute: 26 U.S.C. §401 — Section 401(k)(4)(B) — https://www.law.cornell.edu/uscode/text/26/401
4. Internal Revenue Service: EPCRS Overview — https://www.irs.gov/retirement-plans/epcrs-overview
5. Internal Revenue Service: Top Ten Failures Found in Voluntary Correction Program — https://www.irs.gov/retirement-plans/top-ten-failures-found-in-voluntary-correction-program
6. Internal Revenue Service: Form 14568-F — Model VCP Compliance Statement, Schedule 6 Employer Eligibility Failure — https://www.irs.gov/pub/irs-pdf/f14568f.pdf
7. Internal Revenue Service: Correcting Plan Errors — Fill in VCP Submission Documents — https://www.irs.gov/retirement-plans/correcting-plan-errors-fill-in-vcp-submission-documents
8. Internal Revenue Service: Internal Revenue Manual 7.2.2 — Employee Plans Compliance Resolution System — https://www.irs.gov/irm/part7/irm_07-002-002
9. Internal Revenue Service: IRC Section 414(d) — Governmental Plans for Tribes — https://www.irs.gov/government-entities/indian-tribal-governments/irc-section-414d-governmental-plans-for-tribes

Educational Disclaimer

ROIStreet publishes educational content about retirement-plan qualification and correction. This article is not legal, tax, governmental-benefits, fiduciary or plan-administration advice. Employer eligibility can depend on governmental status, agency or instrumentality analysis, grandfathering, tribal status, rural cooperative rules, predecessor plans, transactions, historical law and current EPCRS guidance. A sponsor should establish eligibility before stopping a plan or changing participant contributions.

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We strive to explain before we evaluate, present evidence before opinions, discuss risks alongside potential benefits, distinguish facts from analysis, and correct material errors transparently.

Our purpose is to help readers better understand investing—not to tell them what to do.