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401 Chaos

Crediting Benefit Service / Vesting Service Earned Prior to Plan Entry

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Forgive me if this is an overly-simple question but I do not normally work with DB plans and was asked a question recently and wanted to see if I was way off-base.

Individual participates in a DB plan that requires a Year of Service in order to satisfy general eligibility service requirement. The Year of Service requires 1,000 Hours within a 12 month period. That period is initially measured from Hire Date to Anniversary Date with the 12 month period shifting to Plan Year if the individual does not earn 1,000 Hours within the first 12 months of employment. The Plan operates on a fiscal rather than calendar year plan year with 6/30 plan year end

The Plan efines Benefit Service and Vesting Service for purposes of calculating benefits as each Plan Year in which an "employee" earns 1,000 Hours of Service beginning with the Plan Year in which the individual was last hired. (The Plan also includes typical Break in Service provisions for crediting prior service following re-employment after Break in Service.)

As I read these provisions, it seems an individual could basically accrue 2 Years of Service for Benefit Service / Vesting Service purposes at the point they first satisfy the basic Year of Service eligibility provisions at the point of their 1 year anniversary. For example, PYE is 6/30, individual hired in December 2009 earns 1,000 Hours of Service in first Plan Year they were hired by getting 1,000 hours by 6/30/2010. Individual will not satisfy the basic service / eligibility requirement until the first anniversary of employment (December 2010) at which point they will have worked 5+ months in a second plan year starting 7/1/2010).

Is this correct? Are such provisions common in DB plans? I know I have seen DB plans where individuals below a certain minimum age (e.g., 21) get credit for Years of Service with 1,000 hours earned in Plan Years before turning age 21 get credit for those years but not sure I've really dealt with that in connection with the regular Year of Service requirements. Thanks.

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It is possible, and I have seen it in some documents, but I wouldn't call it common. I would read the provisions very carefully. Often a "year of service" has a different definition for eligibility, vesting, and benefit accrual. It is fairly typical that you double count eligibility service, but not so for vesting and accrual.

Typically vesting and accrual service is measured only on the plan year and not the employment year.

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In my observation, it is very common. That is, many plans define service w/ 1000-hour rule. The plan may have separate definitions for vesting service and benefit service, but (practically) those definitions are identical. Upon reaching a plan entry date (very often defined with a one-year eligibility period and dual entry dates), the employee will always have earned a YOS and might be very close to earning a second YOS.

Or perhaps I've misread the question.

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Thanks very much. I think that is clearly how the plan documents read and, as far as I know, how the plan counts benefit service. I had a friend who participates in a DB plan ask about this and just wanted to make sure I had not missed anything or misconstrued. I'm used to the 401(k) Year of Service requirement where there really isn't typically an ability to accrue benefits prior to satisfying the initial eligibility requirements.

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