Years of Service

[Guest jnewman]

I have a client who is questioning the years of service for employees on a plan with an effective date of Nov. 1, 1999. Standardized plan that credits service for all employment years.

Example: Full time employee hired in March 1998. My calculation is one year of service each for 1998, 1999, 2000, 2001 & 2002 (only looking at data through 12/31/02). 5 years. His calculation is one year of service each for 1998, 2000, 2001, 2002, and one year for 1/1/99 - 10/31/99, one year for 11/1/99-12/31/99. 6 years. His arguement is for the short plan year, only need 166 hours for a year of service. Somebody hired in October 1999 is credited with a year of service for 1999. He argues that if you credit somebody that wasn't there the full year a year of service just because they had full time hours for that plan year because it was a short plan year, then somebody that was there that same year, but the full year should get 2 years of service. Because if somebody was hired in October 1998, they would not get a year of service for 1998 because they didnt' work 1000 hours in 1998 and then they would only get one year for 1999.

I need help explaining this.

[david rigby]

I assume this is a 401(k) plan since posted on that Message Board. If not, please specify.

What is the plan year? If there is a short plan year, please specify. What kind of service? Vesting? If the plan uses a 5-year cliff vesting schedule, do you care whether the employee has 5 years or 6 years?

But more generally, this should already be governed by the terms of the plan document.

[Earl]

DoH 3/1/98

You say effective date 11/1/99 so I assume it is a 10/31 year end and at some point you change to 12/31.

Vesting is measured at the end of each plan year.

3/1/98 - 10/31/98 = 1 yr (assuming over 1,000 hrs)

11/1/98 - 10/31/99 = 2

11/1/99 - 10/31/00 = 3

11/1/00 - 10/31/01 = 4

11/1/01 - 10/31/02 = 5

01/01/02 - 12/31/02 = 6 (doesn't really matter when the short year was)

I don' t think you pro-rate the hours, I think you keep using the 12 month period ending on the valuation date.

See Labor Reg: 25,457 Changing the vesting computation period.

[Guest jnewman]

This is a 401(k) plan.

The first plan year was a short plan year - from 11/1/99 - 12/31/99. After that it is a calander plan year end.

The plan uses acutal hours method for calculating a year of service.

The vesting schedule is a 6 year graded. So it relavent as to weather they have 5 or 6 years of service.

Employee was hired 3/1/98. Full time. What is her vested as of 12/31/02? My computation would be as follows:

98 - 1 yr

99 - 1 yr

00 - 1 yr

01 - 1 yr

02 - 1 yr

5 years.

My client thinks it should be:

98 - 1 yr

1/1/99 - 10/31/99 - 1 yr

11/1/99 - 12/31/99 - 1 yr

00 - 1 yr

01 - 1 yr

02 - 1 yr

6 years. I disagree because he's double counting 99. There was not vesting computation period change.

His arguement: he doesn't think its fair that somebody hired 11/1/99 will receive a full year of vesting for 99 even though they weren't employeed the full year.

[Earl]

ok:

Vesting is measured at the end of each plan year. You said it includes service before plan so effective date of plan doesn't matter.

DoH 3/1/98:

03/01/98 - 12/31/98 = 1 yr (assuming over 1,000 hrs)

01/01/99 - 12/31/99 = 2

01/01/00 - 12/31/00 = 3

01/01/01 - 12/31/01 = 4

01/01/02 - 12/31/02 = 5

DoH 10/1/99:

10/01/99 - 12/31/99 = 0 (under 1,000 hrs for the 12 months ending 12/31/99)

01/01/00 - 12/31/00 = 1

01/01/01 - 12/31/01 = 2

01/01/02 - 12/31/02 = 3

Again, 25,457 Changing the vesting computation period talks about looking at the 12 month period ending on the valuation date. Short years, effective date of plan (unless elected), date of hire don't enter into it.

[R. Butler]

It seems to me you are correct, based on the facts you have given.

Always check your document, but for vesting purposes why would there be a short year from 11/1/99-12/1/99? Vesting periods must be specified 12 month periods.

[Guest jnewman]

When there is a short plan year - 1000 hour requirement gets prorated, in this case, 2/12 of 1000 hours = 166.67 hours. So if somebody was hired 11/1 and is full time - they meet the 1000 hour requirement for the "plan year" because the plan year is only 2 months.

The confusion for my client begins because we are going back and crediting service prior to the effective date of the plan year - and he wants to split 99 into two computation peroids.

[mwyatt]

An interesting question. In the situation where a plan had been maintaining one form of plan year, then created a short plan year in transitioning to another basis, you could get an overlap under the DOL's rules.

Say you had a plan that was 11/1-10/31 basis, then created a short year 11/1/99-12/31/99 in transitioning to a calendar year basis for 2002. In this case, you would get

prior service measured on 11/1-10/31 basis up to 10/31/99,

Potential year on 11/1/99-10/31/00 basis, and

year on basis 1/1/2000-12/31/2000 (hence leading up to a short year). Hence, you would get an "overlap" credit for two years of service for the 14 month period 11/1/99-12/31/00.

Past discussion on vesting service under a short plan year

Now of course in your situation, there really wasn't a "change" in the plan year; rather just had a short initial plan year. This may argue for measuring entirely on a calendar year basis for vesting, in which case your answer of 5 years is correct.

[Tom Poje]

vesting period is never prorated, it is always a 12 month period

for lack of reg cite I will point to ERISA Outline Book 4.34 (2003 edition)

[R. Butler]

The cite is 411(a)(5).

(5) Year of service

(A) General rule

For purposes of this subsection, except as provided in

subparagraph ©, the term ``year of service'' means a calendar

year, plan year, or other 12-consecutive month period designated

by the plan (and not prohibited under regulations prescribed by

the Secretary of Labor) during which the participant has

completed 1,000 hours of service.

[RTK]

Let me throw my two cents in. The plan document is the key. Assuming as stated that this is a new plan with short plan year in 1999, with vesting service credited for employment before the effective date, the plan should specify the computation period(s) used to credit vesting service. Using calendar computation periods only to credit service in this case would comply with DOL and IRS reguirements.

BTW, DOL regs for amendments to change vesting computation period require only that vesting % be no lower any time after change than vesting % would have been absent the change. Unlike for a change in the accrual computation period, there is no specific requirement for a short computation period and prorated credit. Instead the DOL Regs provide that requirements for a changed vesting computation period are deemed satisfied by overlapping 12 month computation periods (which seems to be a fairly typical method).