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At any time if they complete 3 consecutive months with 83 hours in each month then they become eligible. If they do not do that in the first anniversary period (within 12 months of their date of hire), then you check if they worked 1000 hours during the anniversary period. If not, then revert to the Plan Year for the Year of Service eligibility, but they can still meet eligibility at any time by completing 3 consecutive months with 83 hours in each month.

The IRS would say it's taxable. That the Employer organized but the incentive is funded solely by participating employees does appear to be gambling more than a wellness incentive. Also, that the Employer organized (which I assume also means collected money and will distribute the "winnings") there is likely a legal tax reporting obligation for the Employer. Now if employees did this on their own, it's an office pool and, tax treatment aside, the Employer has no reporting obligation. Can you picture the discussion with the TPA at year end - Why is John's plan comp $500 less than his total comp when there aren't any exclusions? Oh, those are his winnings from the weight loss contest we had, that's not compensation. And such questions/issues seem par for the course in this venue!

looked it up. my bad. my memory is really going. I guess it was Prego that used to advertise "It's in there" but that goes back to 1984 (guess I'm much much older than youngsters like you!)

your best bet would be to try to establish a relationship with a current TPA because what you are asking is not a small question or easy answer. Try to find one to partner with or takeover because they will have that knowledge and be able to share it with you. Trying it go it on your own is going to be tough. Many TPAs started out working a different path (HR consulting firms, the big daily 401k houses, etc) and have gotten experience way before ever starting a TPA firm. It truly isn't just expanding into a new niche. and being snarky with a long time poster isn't going to get you much from other long time posters.