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excluding temporary service for employees subsequently hired

M Norton

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Employer maintains large 401(k) plan, not a safe harbor plan.

Eligibility is age 21 and 3 months (“1/4 year”) of service.

Hours of service are determined on elapsed time method for all purposes.

Entry date is next paydate after meeting eligibility requirements.

Company uses a staffing firm to provide potential employees on a temporary basis before the Company offers them a full time position. The decision to hire is usually made within the first 90 days of temporary service. Very few employees are hired direct; most come through the staffing agency.

The adoption agreement has an option (not previously selected) to exclude Temporary Employees. The Company wahts to use this option to exclude time worked by employees (and associated compensation) while they are temporary workers. Once an employee is hired as a non-temporary employee, his or her retirement plan eligibility and benefits would be counted from that date; the employee would receive no credit for time worked while a temporary employee and no contribution based on wages earned while a temporary employee.


If the Company uses that option to exclude time worked while an employee is considered a temporary worker, (1) will the coverage test be satisfied and (2) will excluding vesting credit be a disqualifying issue?


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First I would look at your exclusion of temporary employees. A flat exclusion would typically be a 410(a) problem. I would expect that what it says is that temporary employees are excluded unless they have a year of service and then they come in.

But, where I think you might have a problem is that you have to give credit for the "lease to own" period. Thus as soon as the person becomes "non-temporary" you still have to include service when they were temporary. I believe the rule is generally that if you have not come into the plan because you are in an excluded class and then you transfer to an included class all service (even during the excluded class period) is counted to see if you have met the service requirement. As KED notes that would include the "lease to own" period. Here is an old link to the "lease to own" analysis but I think this is probably still good. (Look at the "Sally Switch" example)

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