Break in Service choices in an adoption agreement.

[katieinny]

The adoption agreement offers two choices:

1) The Rule of Parity

2) One-year holdout rule

There's probably a default in the plan document (which I don't have).

I'm leaning toward the one-year holdout rule, but I wanted to get some input from some break in service experts.

[Mike Preston]

I prefer the rule of parity. The one year holdout rule is somewhat difficult to deal with at times because it calls for retroactive entry as of date of rehire once the year has been successfully completed. That can cause problems with 410(B) testing, 401(a)(4) testing, ADP testing, ACP testing and just about anything else that is non-discrimination oriented.

[katieinny]

I see your point. As I understand it, under the Rule of Parity, a participant would need to be gone for 5 years before his prior service can be ignored. If he comes back anytime before that, all his prior service counts.

Under the one-year holdout rule, the EE only needs to be gone for 1 year, and then if rehired, you wait to see if he will meet eligibility again. If he does, the prior service counts.

So, if you have a company with quite a bit of turnover, that tends to rehire former employees within a year or 2 of the initial termination, the Rule of Parity will never kick in.

Under the one-year holdout rule, you'll have an administrative nightmare, BUT there's a chance that a couple of people might not meet eligibility again when they return, and therefore would not come into the plan.

Do I have it straight?

[Mike Preston]

It is more complicated than that. A bit much to put into a message here, as I'm tied up today, but you also need to look at things like whether the person was cashed out, how many years they had in the plan to begin with, what the vesting schedule was, what the reitrement age is/was.

But you have the basics pretty close.

Maybe somebody else with more time can elaborate today, or I will try to get to this a bit later.

[katieinny]

I don't want to put anybody through hoops. I'm not the TPA, so I won't be looking at individual EE scenarios such as cash-outs, vesting, years of service, etc.

I'm just trying to assist the employer with making the most logical choices in the adoption agreement based on what I know about the employer's business.

Can the ER use the Rule of Parity for EEs who are gone for a long period of time (over 5 years), and the one-year hold out rule for the those who come and go during shorter periods? Or is that having your cake and eating it too?

[Mike Preston]

Never tried it, so I don't know. I would be somewhat surprised, however, if an adoption agreement gave you the ability to split the issue. Seems to me you would be talking about an individually designed plan in such a case. If so, then you could always submit it and see what the IRS has to say about it.

In a case like this, though, where the issue is more of a pure ERISA-related item, I sometimes wonder if having the IRS issue an LOD does all that the Plan Administrator wants. That is, the DOL could still come in on audit (or a participant could ask a court to decide) and conclude that the provision wasn't consistent with ERISA and you'd have a can of worms on your hands.

Hence, if breaking ground like this appeals to the client, I would suggest not only an LOD but a consultation with an attorney steeped in ERISA-type issues.

[katieinny]

Thanks for your input. I'm not going to experiment with this (or any) client's plan. I'll check with some local people and see what I can find out.