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Rehire after Five Year Break in Service


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#1 jmartinmgo

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Posted 12 September 2011 - 02:28 PM

Facts:

Hired 4/17/89
Terminated 8/31/96
Years of service at termination: Approximately 8
Rehired 8/8/11
Breaks in Service - approximately 15
Service requirement for new employees: 90 days

Wording from plan doc:

(b) Reemployed after five (5) consecutive 1-Year Breaks in Service ("rule of parity" provisions). If any Employee becomes a Former Employee due to severance from employment with the Employer and is reemployed after a 5-Year Break in Service has occurred, Years of Service shall include Years of Service prior to the 5-year break in service subject to the following rules:

(1) Rule of parity. In the case of a Participant who under the Plan does not have a nonforfeitable right to any interest in the Plan resulting from Employer contributions, Years of Service before a period of consecutive 1-Year Breaks in Service will not be taken into account if the number of consecutive 1-Year Breaks in Service equal or exceed the greater of (A) five (5) or (B) the aggregate number of pre-break Years of Service. Such aggregate number of Years of Service will not include any Years of Service disregarded under the preceding sentence by reason of prior period of five (5) consecutive 1-Year Breaks in Service.
2) Participation in Plan. A Former Employee shall participate in the Plan as of the date of reemployment, or if later, as of the date that the Former Employee would otherwise enter the Plan pursuant to Sections 3.1 and 3.2 taking into account all service not disregarded in this subsection.

© Vesting after five (5) consecutive 1-Year Breaks in Service. After a Participant who has severed employment with the Employer incurs five (5) consecutive 1-Year Breaks in Service, the Vested portion of said Participant's Account attributable to pre-break service shall not be increased as a result of post-break service. In such case, separate accounts will be maintained as follows:

(1) one account for nonforfeitable benefits attributable to pre-break service; and
(2) one account representing the Participant's Employer derived account balance in the Plan attributable to post-break service

Question - When does the employe re enter the plan and what is their vesting? My thoughts is that the employee re-enters the plan right away with 100% vesting. He was 100% vested when he terminated. Even though he was gone longer than he was there, I do not think that matters. I do not think Rule of parity would apply here either.

Edited by jmartinmgo, 13 September 2011 - 06:40 AM.


#2 Tom Poje

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Posted 14 September 2011 - 08:15 AM

At the 2010 ASPPA conference the IRS answered the question this way:

Does the rule of parity for vesting permit the disregarding of years of service
for a rehired participant who was nonvested at termination in employer
contributions but had salary deferrals? What about someone who made no
deferrals but could have?

If there is a vested amount, prior service cannot be disregarded, even if the vested account is
attributable to deferrals. IRC 411(a)(6)© and (D). However, if there is a vested percentage,
but no vested amount (i.e., no deferrals made in this example), the rule of parity does permit
prior service to be disregarded.

bah. I must find a way to stop filing dead lines from coming


#3 jmartinmgo

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Posted 14 September 2011 - 08:22 AM

Just to confirm, it all comes down to if he had a balance or not. If he did have a balance, it would have been vested. Therefore he would come back in right away with 8 years of service no matter how long he was away?

#4 Tom Poje

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Posted 14 September 2011 - 09:35 AM

The ERISA Outline Book summed it up as follows
2008 edition, Chapter 2 Section V Part C

2.d.Partially-vested participant. Note that once a participant becomes even partially vested (e.g., 20% vested under the plan's vesting schedule), there is no break in service rule that will permanently disregard his prior service for eligibility purposes. If a partially-vested participant incurs a break in service, the only rule that may apply is the one-year holdout rule discussed in 1. above, under which it is possible to get the prior service re-credited. In fact, the one-year holdout rule would apply even to a 100% vested participant who incurs a break in service.

bah. I must find a way to stop filing dead lines from coming


#5 jmartinmgo

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Posted 14 September 2011 - 11:12 AM

Sorry if I keep repeating myself here....

Here is where I get confused. When the guy termed in '95 he was 100% vested. Let's say he had a balance and took a distribution in '96. Upon rehire in 2011, he has zero balance. I am confident that he comes in right away. But for the new contributions starting 2011 and forward, will that money immediately be 100% vested (due to the 8 years of service) or does the vesting start over at 0%?

One person in our office took the approach that because he had more breaks in service then years of service, he comes in right away but 0% vested.

#6 Tom Poje

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Posted 14 September 2011 - 12:27 PM

here are the examples from the ERISA Outline Book 2008 edition by Sal Tripodi. well worth the investment just for some of the examples alone. (asuming of course the author is correct, which I find to be true in most cases. see especially the last sentence of the first example.)

chapter 4, section VI Part A
2.e.Cash-out has no effect on vesting rights. A cash-out distribution does not affect a participant's service for vesting purposes. The crediting rules and break and service rules discussed in Part C of Section V control the determination of a participant's vesting percentage.



2.e.1)Example. A profit sharing plan uses the 6-year graded vesting schedule. Melissa has 4 years of service for vesting purposes and is 60% vested. Following her termination of employment, she receives a cash-out distribution in 2007 of $6,000, representing her vested interest. The remaining $4,000 is forfeited. In 2009, Melissa returns to employment and does not repay the distribution. For the plan year ending December 31, 2009, Melissa's account is credited with an employer contribution of $2,000. Melissa incurred a break in service in 2008. In 2009 she is credited with at least 1,000 hours of service. Even if the plan uses the one-year break in service rule described in Part C.1. of Section V of this chapter, Melissa's prior years of service must be re-credited because she has earned another year of service. As of December 31, 2009, she has 5 years of vesting service and is 80% vested. The fact Melissa received a cash-out distribution does not affect this vesting computation. The conclusion would be the same even if Melissa does not return to employment until after a 5-year break in service period, when she no longer has the right to restore her pre-break forfeiture by repaying her previous cash-out distribution.



2.e.2)Example. Assume in the prior example that Melissa repays her cash-out distribution during 2009. As of December 31, 2009, Melissa's account balance is $12,000, reflecting the repayment of the cash-out distribution ($6,000), the restoration of the prior forfeiture ($4,000) and the new employer contribution ($2,000). The 80% vesting applies to the entire amount. Remember, the only break in service rule that would prevent Melissa from increasing her vesting in her pre-break account balance ($10,000), is the 5-year break in service rule. Melissa only incurred one break in service. This example illustrates the advantage to the employee of repaying the cash-out distribution. By having the forfeiture restored, Melissa is able to increase vesting in an amount that was once forfeited.

bah. I must find a way to stop filing dead lines from coming