Rule of parity

[Guest carsca]

For purposes of applying the Rule of Parity, can a Plan provide that it will ignore a Participant's 401(k) Contribution Account?

For example, a Participant performs two years of service and terminates employment, at which point he is vested 100% in his pre-tax contributions but 0% vested in his Matching Contriubtions. The Participant returns to his employer 10 years later.

May the Plan exclude his prior two years of service in determining the vested percentage of his post-break Plan account?

Citations would be helpful (the regulations say that the rule of parity applies if a participant is 0% vested in his "employer contributions"-- does this include 401(k) Contributions?)

Thanks in advance.

[R. Butler]

Under 1.401(k)-1©(1)(ii) you can exclude deferrals form 411(a) and treat the participant as 0% upon rehire, however you need to check the doucment. The document may provide that elective deferrals should be considered in applying the Rule of Parity.

[Guest carsca]

Thanks for the quick response. My question really doesn't apply to a specific plan, but is a general question as to the way the Rule works. I understand that in a specific case, the Plan document must be referred to.

As a follow up, can the Rule apply if an individual did not enter the Plan?

For example, an individual is employed by the Company for two years but does not participate in the Company 401(k) Plan becuase he or she is employed by a division of the Company that is not covered by the Plan. The inidividual is then reemployed by the Company 10 years later.

Can the individual's two years be excluded for vesting in post-break contributions?

(I assume the two years must be counted since the individual was never a "participant" in the Plan, as required by the regulations.)

[Guest qualified plan]

Any thoughts out there to this last post?

An individual is employed by the Company for two years but does not participate in the Company 401(k) Plan becuase he or she is employed by a division of the Company that is not covered by the Plan. The inidividual is then reemployed by the Company 10 years later.

Can the individual's two years be excluded for vesting in post-break contributions?

[Blinky the 3-eyed Fish]

For the rule of parity to apply the former employee needed to be a participant in the plan. So no is the answer to your question.

[Guest carsca]

Blinky,

Check this link out:

http://www.benefitslink.com/boards/index.p...=rule+of+parity

[Harwood]

I know a former IRS employee who later wrote a Volume Submitter plan for a well-respected consulting firm.

He was adamant that 1.401(k)-1©(1)(ii) did not apply to vesting.

The essence of his pre-GUST document clause was: Once an Employee becomes a Participant, they are eligible to make 401(k) deferrals. 401(k) deferrals are always 100% vested, therefore Participants can not incur Parity Breaks no matter how many consecutive one-year breaks-in-service.

[E as in ERISA]

Blinky -- An employee who meets the eligibility requirements but does not defer is still a "participant" for most purposes.

[Blinky the 3-eyed Fish]

Katherine, re-read the post. The participant in question was employed in a division that was not covered under the plan.

Let me add that the ERISA Outline Book does not agree with the post linked to above.

[Guest carsca]

According to those of you who say that I can ignore 401(k) Contributions when a plan applies the Rule of Parity (e.g. R Butler), what if the employee was 100% vested in Profit Sharing Contributions but 0% vested in Matching Contributions when he left? Could the plan apply the Rule of Parity once the Participant has a 5 years BIS?

(For those of you who say that 401(k) Contributions would preclude the Rule from applying (e.g., Harwood's IRS agent friend), I assume you would say the same for Profit Sharing Contributions.)

[R. Butler]

what if the employee was 100% vested in Profit Sharing Contributions but 0% vested in Matching Contributions when he left? Could the plan apply the Rule of Parity once the Participant has a 5 years BIS?

Rule of Parity cannot be applied to this participant. That participant is not 0% vested & 1.401(k)-1©(1)(ii) obviously only applies to the deferrals.

[RTK]

My opinion: profit sharing contributions and matching contributions are both employer contributions for purposes of parity rule, and once vested in one, parity rule does not apply to either.

Regarding the application of the parity rule to non-participant employment, because vesting service (and eligibility to participate) service is required to be based on controlled group employment, I have written all of my plan documents, including volume submitters, to apply plan's parity rule to controlled group employment (regardless of participant status.) Otherwise, from a practical viewpoint, employees in different subsidiaries or divisions who have the same employment histories would have different participation and vesting rights under the various controlled group plans. Also, any employment anywhere and anytime in the controlled group would forever be relevant for vesting and participation in all controlled group plan.

A similar type of question occurred when a controlled group maintained plans with different vesting schedules. For purposes of applying the parity rule, an employee could be vested in one plan, but not another, and some argued (not me) that once vested in one plan, the parity rule would never apply to any plan.

[GBurns]

RTK

Is it true that even if you did not have such wording in your PD, the employees would still be eligible etc because of being employed by a member of a controlled group?

[Guest carsca]

Thanks, RTK and R Butler for your responses.

I want to try and follow-up on your responses, with the following question:

If a Company sponsors a Profit Sharing Plan (where employees are eligible for Profit Sharing Contributions after two years of service -- and are 100% vested thereafter in such contributions), and the plan includes 401(k) and Matching Contribution features, can the plan provide that employees who terminate employment before completting 2 years of service lose their service for Profit Sharing purposes after a 1 year break in service?

I know Section 410(a)(5)(B) permits a profit sharing plan plan to ignore such service, but I'm not sure if it applies to a profit sharing plan that has 401(k) and (m) features. Any thoughts/guidance would be appreciated.

Thanks in advance.

[R. Butler]

I just you an e-mail on that question, but just to summarize, if the rehired employee was a participant in the 401(k) portion at the time of termination I would not disregard the prior service for profit sharing. 410(a)(5)(B) refers you to 410(a)(1)(B)(i); I would not consider each disaggrated portion a separate plan for this purpose. If I say that they are separate plans here wouldn't I have to use the same reasoning in applying the Rule of Parity? As you can tell from my prior post, I don't consider each portion disaggregated for the Rule of Parity.

[Guest carsca]

Thanks, R Butler.

As I emailed you, I think a distinction can be made between the ROP and 410(a)(5)(B) based on the language of the statute, but I would be very interested in hearing from others out there on this.

Thanks again.

[RTK]

GBurns: Controlled group employment is required as a matter of law and tax qualification to be recognized for purposes of eligibility to participate in the plan, because the employees of controlled group members are required to be treated as employed by a single employer. That being said, whether or not an employee has sufficient years of service based on the controlled group employment to participate in any particular plan would be determined by the terms of that plan.

Carsca: I am not aware of any specific guidance, and I don't have time to properly look and think. But based on the thinking behind the favorable provisions made for a plan with immediate 401(k) eligibility, it seems that the same should apply to the 2 year profit sharing rule. I just don't know if Code would support.

[Guest carsca]

Thanks for the reply, RTK.

Quick clarification, if you would:

What "thinking behind the favorable provisions made for a plan with immediate 401(k) eligibility" would have a bearing on the present scenario?

Also, and this is a slightly different question for those who say that 401(k) Contributions can be ignored in applying the ROP, what if a plan has a one year of service eligiblity provision for 401(k) and Matching Contributions (but no Profit Sharing Contribution provisions at all), Matching Contributions are subject to a three year cliff vesting schedule, and a Participant completes two years of service and leaves for 6 years. Assuming the ROP operates, must the employee enter the plan immediately upon rehire for 401(k) Contribution purposes (and a year later for Matching Contribution purposes), or could the ROP operate to ignore a Participant's prior service for both 401(k) Contribution and Matching Contribution purposes?

Thanks in advance.

[Guest qualified plan]

I believe the Rule of Parity would force the employee to complete a year of service upon rehire for both 401(k) and Matching purposes.