One Year Hold-out and 401(k)

[Guest rocnrols2]

Company X sponsors a 401(k) plan for its employees. Employees are eligible to make 401(k) deferrrals on the date of hire. They are eligible to receive a match after 1 year of service. The plan includes a one-year holdout rule for eligibility and vesting breaks-in-service (i.e., employees who have a break-in-service do not have their pre-break service unless they have completed one-year of service following their return. At that time, they must be retroactively credited with pre-break service, but also service from their date of reemployment). Employee A has completed two years-of-service and then has a two-year break-in-service. Upon rehire, A resumes 401(k) deferrals. A completes one year of service after her/his return and begins to receive matching contributions after the one=year of service is completed. Does Company X have to retroactively make a matching contribution during the one-year period beginning on his/her date of reemployment?

[Tom Poje]

The ERISA Outline Book has a small discussion on this issue (2.49 in the 2001 edition)

it basically refers to it as an administrative nightmare - especially if you had to wait to defer as well.

at least you don't have that problem!

I would assume you would have to provide the match, which also means you would have to add the employee to the ACP test and rerun. Wouldn't that be fun if it changed the test results !

Imagine if you refunded $ and now the test passes! or now the test fails and you have to refund $ a year after the fact.

Another consideration: suppose the plan is also top heavy! then you have to provide that as well.

[Guest rocnrols2]

Tom, Thanks for your comments. Fortunately, X is a large employer so that top-heavy will rarely be an issue. I did look at the portion of the ERISA Outline Book and it didn't cite any official IRS authority in support of its position.