Correction for not Crediting Service?

[Guest kjk]

What correction methods are available to a defined benefit pension plan that has failed to properly credit prior (union) service with the employer, resulting in some employees leaving employment without a vested benefit (the plan has a five year cliff vesting schedule) despite the fact that if their service had been properly credited in accordance with the terms of the Plan and with ERISA, then they should have had a vested benefit? How far back do we have to correct?

[david rigby]

How far back do your records go?

If you know about an error, seems like a good idea to do whatever you can to correct it, without regard to time.

[Guest kjk]

That's what I was afraid you were going to say, and I think you are right. I'm not sure how far back this employer's records go; they are in bankruptcy; the plan's been existence since the mid-1950's and as far as anyone is aware, it has never properly credited service. Any suggestions on correction? Is the bottom line that we have to track these people down and now provide them with a benefit?

[mbozek]

Prior to ERISA there were no statutory vesting reqirements. You may be limited to fixing the plan from 1976 forward but you need to consult counsel.

[Guest Keith N]

Just to clarify, are you talking about people who transfered from union status to non-union status and that the employer didn't count their union service for vesting and therefore people terminated from the non-union plan as non-vested who really should have been vested due to their union service?

And this has been going on "for ever" and no one questioned it?

[Guest kjk]

I think you have stated it correctly. The employer maintains a pension plan for its "supervisory" employees (translation: not union employees) but sometimes they have had union employees who work their way through the ranks and become supervisors, eligible for the plan. However, the employer has not been counting the prior union service toward vesting in the plan, and apparently noone has ever questioned it.

[david rigby]

It is a bit breath-taking to think that service crediting might be incorrect for (at least) the last 25 years. If true, the employer might assert a claim that some advisor should have been monitoring this.

[mbozek]

Why is it that every time there is a failure to operate a plan in compliance with the law there must be an advisor to blame. My experience has been that most large plan administrators do not understand their plan vesting rules. However, it is the the plan admin who determines the amt of vesting svc to be credited. Actuaries, TPA, etc only compute benefits based on the plan admin determination. Most plans cant even determine who performs a yr of svc under the 1000 hr of svc rule no less apply complicated entry or BIS rules. Thats why ers should adopt elapsed time svc rules even if it means covering part timers who may not perform 1000 hrs of svc. It may seem startling but there are a lot of HR people who dont know that vesting service must include all years of service not just the years the employee is eligible to participate in the plan.

[david rigby]

Hmmm. I did not mean to imply that some external service provider was at fault, only that such provider might expect to be the target of blame. It is even possible that the employer got some incorrect advice many years ago.

[Mike Preston]

OK, it's Saturday, so let me take a swipe at that 1,000 hour comment. Phooey. If one is concerned about counting hours properly it is far less expensive to institute one of the DOL equivalencies than the elapsed time method. And, vesting does not need to be recognized for all service, just for service while a plan was in effect. And, in fact, with the strange successor plan rules, one can even ignore service from when a terminated plan was in effect as long as the new plan is bound and detemrined to be kept alive for a period of 5 years since the terminated plan went out of existence.

So, while the general rule is that you count all service for vesting, there are enough exceptions that I wouldn't expect an individual that doesn't practice in this area to inherently know when it is ok and when it isn't ok to credit service.

[mbozek]

MIke YOur missing my point. Employers establish hours of service rules in DB plans to keep out part timers-- Using equvalencies only make it easier for Pters to join the plan. The problem with using any hour of service rule is that the plan admin has to be able to determine the # of hours that a pt ee works each year and most plans do not have the capability to do this because of budget or system constraints which results in using some arbitrary method of counting service, e.g., # of scheduled hours. that why I sugggested elapsed time as an alternative.

[david rigby]

I disagree with the implication that it is difficult to count hours. Probably very easy with most payroll systems.

Elapsed time method makes sense when most of the participants are full time, when counting of hours does not provide any distinction.

[mbozek]

Payroll systems do not always count hours worked - some systems do not distinguish between regular and over time hours.

Some systems only record $ paid. What I am saying is that before a plan adopts an hours of service rule it needs to have a systmem for counting hours for participation, vesting and accruals and be able to implement a BIS provision and not expect the HR staff to do these calculations manually.

[Mike Preston]

Here in California we seem to be awash in employers that count hours for part timers, so I'm not sure that I agree with you that employers aren't able to do that. I agree that elapsed time is better, if the intent is to eliminate part timers from the plan, than the DOL equivalencies.

[mbozek]

The question is whether the hours are correctly counted. Many employers use made up approximations, eg. 4 hours for each day or # of hours scheduled to be worked as a substitute for actual hours worked by PTimers and exclude holidays, vacation etc. ,days paid. I have no problem with using hours of service as long as the er has be capability to count the actual hours worked and the BIS periods for eligibility, vesting and accrual. My experience tells me that this is not how plans are operated.

[AndyH]

Was this plan subject to (accountant's) audit, and if so (to the board members), do the auditors have any responsibility for looking at something like this?

I've seen a rash of takeovers recently with problems that I would expect auditors to have detected. Where does their responsibility for looking at operational matters begin and end?

[mbozek]

I dont understand what you are asking about? Are you referring to due dilligence inquiries which are conducted prior to a takeover or acquisition? If so the answer is no because there is not enough time to do an operational review before closing nor are pension plans regarded as being so important in an acquisiton to hold up the closing until there is an audit of the plans operation. I have been involved in several acquisitions where the deal is closed before all of the necesary documents, e.g, plan document, determination letter, annual reports, etc have been delivered no less reviewed. The buyer usually relies on the representations of the seller that the plan is in compliance with the IRC and ERISA, is a qualified plan and that all required contaributions have been made. Many times the buyer realizes what a mess they bought only after the acquisition. As buyer's representative I have become quite adept at writing due dilligence reports that caveat all of the unknown factors and risks in benefit plans that may be encountered when insufficient information has been provided by seller.

[AndyH]

I am referring to an accountant's opinion which is an attachment to Form 5500. One of the questions asked (on the 5500 form series) is how many participants terminated during the year that were less than 100% vested.

I am wondering if the accountants have any responsibility for reviewing the standards by which this question is answered. Some accountants look at this stuff pretty closely. Others do not. I do not know what if any responsibility they would have in this situation.

[mbozek]

I dont know. If the accountant is willing to review the employers records (and the employer is willing to pay for the cost of such a review) there will be an outside review. Would any accountant like to respond as to whether there is any responsibility to verify the information provided by the employer for this as well as all of the other information submitted by the employerwill for completing the 5500.

[mwyatt]

The auditor requirement is part of every annual 5500 filing for plans with over 100 participants. This has been in place for quite some time. Obviously plan assets are gone over with a fine tooth comb; our experience has also been that census data is verified in some manner also.

Also, the elapsed time v. 1000 Hours requirement skirts the real issue here - vesting service not counted while an excluded employee. Think plan sponsor could just have easily messed this up using either way of crediting service (i.e., if using elapsed time just count from date of status change rather than date of hire). And I would also say that the "part timer" rational for using 1,000 Hours method of crediting service is certainly not endemic to Defined Benefit plans. If anything (especially with top heavy plans), motivation is actually higher for a DC plan to exclude part timers as under IRC 416, they get a TH contribution regardless of hours worked, while under a DB plan, only get TH minimum accrual if complete 1000 Hours of Service in TH year.

Interesting discussion (but a nightmare situation to contemplate).

[Mike Preston]

Is this a situation where the plan document is individually designed, included provisions that the plan sponsor should not have gotten approved by the IRS, but nonetheless was approved by the IRS which, because of the letter of determination, is entitled to 7805B relief?