Does this rehired employee have to wait another year before becoming a

[Guest Sara H]

An employee worked for her employer from 10/1/96 to 9/30/97 and was laid off due to a cut in funding. She was never a "participant" due to the fact that entry dates are 7/1 and 1/1. She has just been rehired. Am I correct in telling the employer that she must wait a full year again before becoming eligible because she had a break in service -- even though she did not quit and wasn't fired?

[LCARUSI]

You haven't iven enough information for someone to answer the question (how is service calculated etc.), but you should check the Plan document. It should cover the rules for rehires.

[M R Bernardin]

In my experience, many plan documents are very vague as to how to handle this situation. Some do not address the rehire of a former employee who was not previously a participant. Others say that a rehire who was not previously a participant is to be "treated as a new employee for all purposes." Having looked at the regulations on crediting of hours of service, it seems to me that there is no authority for disregarding prior service when determining eligibility to participate (although prior service can be disregarded for vesting purposes under various circumstances). Thus, I believe that in your situation, the rehire gets credit for her prior service so that she already has her year of service upon rehire and is immediately eligible to participate. Does anyone disagree?

[LCARUSI]

I've never dealt with a plan that was vague on this issue. In fact, there was a great deal of detail and it was very difficult and tedious reading.

I think there are limited situations in which you can disregard prior service for eligibility, such as if the employee didn't meet the eligibility threshhold during the first period of employment.

I still think the first and obvious place to look is the plan document.

[Dowist]

You'd have to read the plan, but if the employee was credited with a year of service when she left (had 1000 hours of service in her first period of employment - note she wouldn't have to be employed for a 12-month continuous period), she would still have that year (under IRS rules and ERISA)when she came back and would have to be let into the plan immediately (general rule). If she didn't have a year when she left, she starts over.

Caveats: 1. If the plan was an elapsed time plan, she might not have a year of service even if she had 1000 hours if she wasn't employed for the full 12 months. 2. If the plan had a 2 year eligibility standard (as opposed to a one year or less standard), you can disregard service after a one year break in service (500 or fewer hours in the computation period), which would mean you could make her start over - but this would be unusual.

Basically, I think you may be wrong and they'll have to bring her into the plan immediately (but look at the plan and the rules - IRC ss 410 - which tell you when you can disregard prior service).

[John A]

My experience has been closer to M R Bernardin - plan documents are often vague on this issue - when an employee separated from service after meeting the eligibility requirements but before becoming a participant and is subsequently rehired.

IRS Reg. 1.410(a)-4(b)says:

(B) Time of participation:

(1) General rule.

A plan is not a qualified plan (and a trust forming a part of such plan is not a qualified trust) unless under the plan any employee who has satisfied the applicable minimum age and service requirements specified in § 1.410(a)-3, and who is otherwise entitled to participate in the plan, commences participation in the plan no later than the earlier of:

(i) The first day of the first plan year beginning after the date on which such employee first satisfied such requirements, or

(ii) The date 6 months after the date on which he first satisfied such requirements, unless such employee was separated from service and has not returned before the date referred to in subdivision (i) or (ii), whichever is applicable. If such separated employee returns to service after either of such dates without incurring a 1-year break in service, the employee must commence participation immediately upon his return. In the case of a plan using the elapsed time method described in § 1.410(a)-7, such an employee who has a period of absence commencing before the date referred to in subdivision (i) or (ii) (whichever is applicable) must commence participation as of such applicable date no later than the date such absence ended. However, if an employee's prior service is disregarded on account of the plan's break-in-service rules then, for purposes of this subparagraph, such service is also disregarded for purposes of determining the date on which such employee first satisfied the minimum age and service requirements.

In the situation presented by Sara H, it would appear that whether or not the 10/1/96 to 9/30/97 period of employment is used in determinining participation depends on the plan's break-in-service rules. If the plan does not have break-in-service rules, I would believe the employee would enter immediately upon rehire. On the other hand, if the plan's break-in-service rules allow for disregarding service prior to a break-in-service, the employee would be treated as a new employee. Does anyone disagree with this? Can anyone else add anything helpful for determining entry dates for rehires that had met the plan's eligibility requirements but terminated employment prior to an entry date?

[John A]

IRS Reg 1.410(a)-5 says the following:

1.410(a)-5 Year of service; break in service.

(a) Year of service.

For the rules relating to years of service under subparagraphs (A), ©, and (D) of section 410(a)(3), see regulations prescribed by the Secretary of Labor under 29 CFR Part 2530, relating to minimum standards for employee pension benefit plans.

...

© Breaks in service:

(1) General rule.

This paragraph provides rules with respect to breaks in service under section 410(a)(5). Except as provided in subparagraphs (2), (3), (4), and (5) of this paragraph, all of an employee's years of service with the employer or employers maintaining a plan are taken into account in computing his period of service under the plan for purposes of section 410(a)(1) and § 1.410(a)-3.

...

(3) One-year break in service:

(i) In general.

In computing the period of service of an employee who has incurred a 1-year break in service, for purposes of section 410(a)(1) and § 1.410(a)-3, a plan may disregard the employee's service before the break until the employee completes a year of service after such break in service.

(ii) Examples.

The rules provided by this subparagraph are illustrated by the following examples.

Example (1). Employee A completes a year of service under a plan computing service by the actual counting of hours for the 12-month period ending December 31, 1980, and incurs a 1-year break in service for the 12-month period ending December 31, 1981. The plan does not contain the provisions permitted by section 410(a)(5)(B) (relating to 3-year 100 percent vesting) and section 410(a)(5)(D) (relating to nonvested participants). Thereafter, he does not complete a year of service. As of January 1, 1982, in computing his period of service under the plan his service prior to December 31, 1981, is not required to be taken into account for purposes of section 410(a)(1) and § 1.410 (a)-3.

Example (2). The employee in example (1) completes a year of service for the 12-month period ending December 31, 1982. Prior to December 31, 1982, in computing the employee's period of service as of any date occurring in 1982, the employee's service before December 31, 1981, is not required to be taken into account for purposes of section 410(a)(1) and § 11.410(a)-3. Because the employee completed a year of service for the 12-month period ending December 31, 1982, however, his period of service is redetermined as of January 1, 1982. Upon completion of a year of service for 1982, the employee's period of service, determined as of any date occurring in 1982, includes service prior to December 31, 1981.

Does this mean that in the situation presented by Sara H, the 10/1/96 to 9/30/97 period of employment would not have to be considered immediately upon rehire, but would have to be considered as soon as the employee completed the year of service starting on her 1999 rehire date, at which time she would retroactively participate? If Sara H's plan is a 401(k) plan, this would of course not be feasible, so does this mean that the employee would participate immediately if Sara H's plan is a 401(k) plan, even if the prior period of service would be excluded under the plan's break-in-service rules?

[Wessex]

The "one-year hold-out" rule referred to in John A's post is permissive, not mandatory, thus it would apply only if the plan document so provided. As a practical matter, it is unworkable in a 401(k) plan for deferrals and problematic with matching contributions made on an ongoing basis. I think it could also be a problem for matching contributions and profit sharing contributions if there is not a 1000 hour requirement for allocations; a person could be rehired late in the year and then become entitled to a contribution a year later (but for the year of rehire) after the time that the employer's tax return for that year has been filed. The one-year hold-out rule is thoughtlessly included as a base document standard provision in some prototype documents -- including those by well-known vendors.

On a more general note, I could be entirely wrong, but I am not convinced that the provisions of the 410(a) regulations regarding not taking prior service into account after a one-year break in service are still valid. If my memory is correct, these regulations were generally promulgated before 1985 and have only been updated in minimal respects after that date. Wouldn't it take five consecutive one-year breaks in service before the plan could disregard prior service? (Ignoring the two-year and 100% vesting possibility.)