Service question

[Guest qualified plan]

A plan has an elapsed time service requirement of 1 year of service, and an employee was hired January 1, 2003 and terminates May 31, 2003, and is then rehired on December 1, 2004.

Does the employee have 5 or 0 months of service upon rehire?

Please give a cite to support your conclusion. Much thanks.

[Mike Preston]

What does the plan say?

[Brian Gallagher]

did you mean Dec, 1, 2003? (not '04?)

if the person did not incur a 1 yr break in service, we count it as is he was employed throughout, as if he never left.

[Guest qualified plan]

Brian,

I intentionally meant December 1, 2004, so the employee would have a one year break in service, and the service spanning rules of the Code would not apply. With respect to Mike's reply, consider the plan irrelevant, since I am asking whether a plan CAN provide that an employee has "0" months of service upon rehire.

As I understand it, the only way to ignore this employee's prior service is by applying the Rule of Parity set forth in Tres. Reg. 1.410(a)-7(d)(6). That Reg. provides that after a one year break in service, a participant's prior service can be ignored if he was 0% vested. However, in 1982, the Rule of Parity was amended under Section 410(a)(5)(D) to require a 5 year break in service in order to apply the Rule. So applying the "new" Rule, it appears that, since the employee did not incur a 5 year break, all of the employee's prior service must be counted, so the employee would have "5" months of service upon rehire.

On the other hand, the Treas. Reg. was never amended, so perhaps the Rule of Parity should apply as written, so the employee upon rehire would have "0" months of service.

Any thoughts would be greatly appreciated.

[Mike Preston]

Sorry, I didn't read it as a hypothetical. My bad.

[Guest qualified plan]

No need to apologize. What do you think the answer is?

[Mike Preston]

Having just returned from a week in DC, I don't have time to properly research it, so I wouldn't want to opine as to what the answer really is. I can tell you that my documents provide that there are two key issues you didn't address:

1) Is the underlying vesting schedule 100% at all times?; and,

2) Was the individual a participant when employment terminated the first time?

In the first case, it might not seem like service means much, but it still applies for other purposes (formulas, etc.)

But my guess, without researching, is that this person must have a 5 month period of service that can't be ignored unless the plan otherwise calls for 100% vesting on all accounts.

[Guest qualified plan]

For the sake of completeness, in my example the vesting schedule is a three year cliff schedule and the individual was not a participant when his employment terminated the first time.

Anyone else have thoughts on this?

Thanks.

[R. Butler]

Without researching too much I don't see how you can exclude the 5 months indefinitely. §410(a)(5) provides in part that "...Except as otherwise provided in subparagraphs (B), ©, and (D), all years of service with the employer or employers maintaining the plan shall be taken into account in computing

the period of service for purposes of paragraph (1)." Since we don't have a 2 year eligibilty requirement §410(a)(5)(B) does not apply. The Rule of Parity (§410(a)(5)(D)) does not apply because this employee is not a participant & furthermore has was previously pointed out there haven't been 5 consecutive breaks in service. That leaves §410(a)(5)©, the one year break in service rule.

After revieiwing 1.410(a)-(7)©(5) it seems to me that you could require an additional period of service, but once that additional period is completed employee would get credit for all prior service. The difficulty with that, particularly in a 401(k) plan is the retroactive entry.

"...5) One-year hold-out--(i) General rule. (A) For purposes of section

410(a)(5)©, in determining the period of service of an employee who

has incurred a 1-year period of severance, a plan may disregard the

employee's period of service before such period of severance until the

employee completes a 1-year period of service after such period of

severance.

(B) Example. Assume that a plan provides for a minimum service

requirement of 1-year and provides for semi-annual entry dates, but does

not contain the provisions permitted by section 410(a)(5)(D) (relating

to the rule of parity). Employee G, age 40, completed a seven-month

period of service, quit and then returned to service 15 months later,

thereby incurring a 1-year period of severance. After working four

months, G was laid off for nine months and then returned to work again.

Although the plan may hold employee G out from participation in the plan

until the completion of a 1-year period of service after the 1-year (or

greater) period of severance, once the 1-year hold-out is completed, the

plan is required to provide the employee with such statutory entitlement

as arose during the 1-year hold-out. Accordingly, employee G satisfied

the 1-year hold-out requirement as of the eighth month of layoff, and G

is entitled to become a participant in the plan immediately upon his

return to service after the nine-month layoff effective as of the first

applicable entry date occurring after the date on which he satisfied the

1-year of service requirement (i.e., the first applicable entry date

after the first month of layoff). See the regulations under section 410

(a) (relating to eligibility to participate)..."

[Guest qualified plan]

Thanks, R. Butler.

I agree with your conclusion that 1.410(a)-7©(5) would not apply, but how do you interpret 1.410(a)-7©(6)?

[R. Butler]

...but how do you interpret 1.410(a)-7©(6)?

For purposes of your question, I never get to it. The Rule of Parity doesn't apply here.