If your company is opening a second location or adding a union group, 401(k) coverage testing is one of the first plan questions that changes, and it is a fiduciary question, not a payroll one. The new workers do not automatically fit your plan’s eligibility language, and the way you answer determines who is covered, who is excluded, and whether the plan can still pass its tests.
Why a New Location or Union Group Is a Plan Event
Most plan documents were written for the workforce that existed when the plan was adopted. A new site, a new business line, or a newly organized bargaining unit introduces employees the document may not have anticipated. Your plan administrator has to read the document against the new facts, and the sponsor has to make the settlor decisions the document leaves open. Our guide on plan document and operations mismatches explains how quietly a plan drifts when practice stops matching paper.
The risks sponsors run into most often:
- New employees are enrolled by default when the document actually excludes them.
- Union employees are excluded by habit, with no collective bargaining agreement language supporting it.
- The new location sits in a separate legal entity that was never analyzed for controlled group status.
- Coverage and nondiscrimination testing is run on the old population and never re-run on the new one.
Step One: Decide Whether the New Group Is Part of Your Employer at All
1. Check the entity structure
A second location may be a branch of the same company or a newly formed entity. Related entities can be treated as one employer for testing purposes whether or not they share a plan. Review controlled group 401(k) plans before assuming the new entity stands alone.
2. Confirm whether the new entity is a participating employer
If the document does not name the new entity as an adopting employer, its employees may not be eligible at all, and enrolling them anyway creates an operational failure. Adoption is a settlor act that belongs in writing.
3. Revisit any acquisition angle
If the new location came through a purchase, the questions widen to prior plan terms and service credit. See plan mergers and spinoffs after an acquisition.
Step Two: Read the Eligibility and Exclusion Language Closely
1. Locate the classification exclusions
Many documents exclude employees covered by a collective bargaining agreement, nonresident aliens with no U.S. source income, or specific job classes. The exclusion works only if the document says so and the facts fit it. The same reading discipline applies in worker reclassification and 401(k) eligibility.
2. Confirm the union exclusion actually applies
A bargaining unit exclusion typically depends on retirement benefits being the subject of good faith bargaining. If a union group is added and the agreement is silent on the plan, do not assume the exclusion covers them. Confirm with your document provider and, where needed, labor counsel.
3. Check entry dates and service rules for the new hires
Eligibility service, entry dates, and any prior service credit must be applied the same way to the new group as to everyone else the document covers. Our page on 401(k) eligibility and entry dates walks through the mechanics.
Step Three: Understand How Coverage Testing Changes
1. Separate coverage from nondiscrimination
Coverage testing asks whether the plan benefits a fair cross-section of employees. Nondiscrimination testing asks whether contributions and benefits favor highly compensated employees. Adding a group can move the result of either test. See nondiscrimination testing for sponsors for the broader picture.
2. Know that excluded groups still count in the denominator
Excluding a new group by classification does not remove them from the testing population in every case. How they are treated depends on the exclusion type and the testing method your plan uses. Ask your administrator to model both outcomes before the group is hired or organized.
3. Consider testing the groups separately
Some plans may test certain groups separately, such as a bargaining unit with its own benefits, but the rules are technical and plan specific. Confirm any approach with your document provider before relying on it.
4. Watch ADP and ACP results
A new group with low participation can drag down average deferral results for the non-highly-compensated group. If the plan fails, the correction choice is a sponsor decision. Read ADP/ACP test failure before it happens.
Step Four: Check Top-Heavy and Safe Harbor Consequences
A new group can change the key employee picture and top-heavy status of the plan, which can trigger minimum contribution obligations. See top-heavy 401(k) plans. If you run a safe harbor design, adding a group may interact with notice and contribution commitments. Review safe harbor 401(k) sponsor commitments and treat any design change as a trade, not a free fix.
Step Five: Eight-Step Self-Check Before the First Paycheck
- Identify the legal entity that employs the new group.
- Confirm whether the entity is related to yours for testing purposes.
- Verify the entity is a named participating employer in the document.
- Read every exclusion that could apply and compare it to the actual facts.
- For union groups, obtain the bargaining agreement language on retirement benefits.
- Ask your administrator to run coverage and nondiscrimination scenarios with and without the group.
- Update payroll eligibility codes and the plan census feed so the right people are enrolled or excluded.
- Document each decision in committee minutes. Our guide to plan committee meeting minutes shows what to record.
Where Sponsors Get Hurt
- Excluding by assumption. A group left out of the plan without document support can become a missed enrollment claim. The remedy is in correcting a missed deferral election.
- Enrolling by assumption. Letting excluded employees defer creates an operational error and may require correction under administrative error correction.
- Testing the old population. A plan that passed last year can fail this year once the new group enters the data.
- No amendment trail. Changing eligibility without a signed amendment leaves operation ahead of the document.
What You Can Delegate and What You Cannot
Gathering the census, modeling test scenarios, applying the document’s exclusions, and keeping the records can all be delegated to a 3(16) plan administrator. The settlor decisions cannot: whether to adopt the new entity into the plan, whether to extend coverage to a bargaining unit, whether to amend eligibility terms, and whether to change a safe harbor design. Those belong to the employer, and they should be made deliberately and recorded. Only the employer holds the facts about who actually works where, under which agreement, and in which entity, so those inputs must come from you.
Put a Named Fiduciary Behind the Decision
Growth events are when well-run plans go quietly out of compliance, because the decisions land in the gap between HR, payroll, and the plan document. Admin316 accepts formal appointment as the plan’s ERISA 402(a) named fiduciary, which most providers decline, so the responsibility for running the plan under its terms has a clear owner. You can also run a fiduciary risk check first.
Opening a location or onboarding a union group? Book a call with Admin316 and we will map eligibility and coverage testing before your first payroll.
