Counting hours for salaried employees

[katieinny]

A plan uses actual hours to meet the 1000 hours requirement for a year of service. There are several salaried employees on staff, which means that no one keeps track of their hours. Should there be something specifically listed in the employees salary package indicating that he or she is considered a full time employee?

[QDROphile]

No, you need to either find a way to count actual hours or you need to amend the plan document to provide for counting hours of the salaried employees by one of the allowable equivalency methods. See ERISA reg. section 2530-200b-3(a) and ©. Note that the standard payroll practice of crediting 2080 hours per year (pro-rated) is not acceptable.

Most employers with prototype documents and salried employess violate the hours counting rules.

[katieinny]

There must be a million violations! Most small employers don't track the owner's time and that of their HCE staff or even middle management people, and I doubt that large employers do either.

Can you give me some examples of how it might be done without going with one of the equivalencies?

[Kirk Maldonado]

One solution to avoid having to track hours or use equivalencies is to adopt the "elapsed time" method of crediting service. See Treas. Reg. § 1.410(a)-7.

[AndyH]

Note that the standard payroll practice of crediting 2080 hours per year (pro-rated) is not acceptable.

QDROphile, would you please elaborate on this comment? What is the source?

[Guest Boilerburm]

Katie -

For the group that you are discussing, in general, does this ever really come in to play?? I don't know of too many places where owners, HCEs, or even middle managers are working anywhere close to 1000 hours - usually it's more like 3000!!

In regards to your general question, I agree with QDROphile in that for those people who are close to the 1000 hour threshhold, most employers use technically incorrect methods of determining hours, but I doubt that it comes up all that often (not that that makes it okay . . . . ).

[QDROphile]

AndyH:

The regulations prescribe the options and the number of hours per period. Neither 2080 hours per year nor a prorated portion of 2080 per period is on the list. In fact, all of the precribed numbers are greater than you would use if you used 2080 per year, so the standard mistaken convention understates the hours. That makes the standard mistake dangerous.

I agree with Boilerburm that it will rarely make a difference to a participant. But if the plan is asked to demonstrate compliance because of an audit, a claim, or in due diligence for a merger or acquisition, it becomes a challenge.

[AndyH]

You are probably right; I am probably wrong, but the last time I looked at this, which was a while ago, I thought that the regulations defined the alternatives to "the standard", not "the standard". And I agree that 2080 was not an alternative in the equivalency regulation. All were indeed higher. But I did not take from that that 2080 is not acceptable. I'll look at this again when I get a few minutes, and I again I am speaking from recollection only.

I though I remembered reading somewhere that a salaried employee who was expected to work 40 hours per week could not claim credit for 45 hours if he/she worked more than 40. Again, only from old memory, but this is why I asked.

[katieinny]

Boilerburm -- You're right, the salaried employees are working closer to 3,000 hours. I'm just wondering if they're ever going to have to prove it. I haven't heard that it's been an audit issue. One practitioner told me that their agent simply used equivalencies for the salaried people when the plan was audited, even though the plan said actual hours.

[AndyH]

Here is the regulation to which I refer, as a starting point. I submit that the empoyer's stated requirements for the position govern for a salaried person.

Where does it say that 40 hours a week is inappropriate for a salaried person, even if such person happens to work 50 hours per week "voluntarily"?

Section Number: 2530.200b-2

Section Name: Hour of service.

--------------------------------------------------------------------------------

(a) General rule. An hour of service which must, as a minimum, be

counted for the purposes of determining a year of service, a year of

participation for benefit accrual, a break in service and employment

commencement date (or reemployment commencement date) under sections

202, 203 and 204 of the Act and sections 410 and 411 of the Code, is an

hour of service as defined in paragraphs (a)(1), (2) and (3) of this

section. The employer may round up hours at the end of a computation

period or more frequently.

(1) An hour of service is each hour for which an employee is paid,

or entitled to payment, for the performance of duties for the employer

during the applicable computation period.

(2) An hour of service is each hour for which an employee is paid,

or entitled to payment, by the employer on account of a period of time

during which no duties are performed (irrespective of whether the

employment relationship has terminated) due to vacation, holiday,

illness, incapacity (including disability), layoff, jury duty, military

duty or leave of absence. Notwithstanding the preceding sentence,

(i) No more than 501 hours of service are required to be credited

under this paragraph (a)(2) to an employee on account of any single

continuous period during which the employee performs no duties (whether

or not such period occurs in a single computation period);

(ii) An hour for which an employee is directly or indirectly paid,

or entitled to payment, on account of a period during which no duties

are performed is not required to be credited to the employee if such

payment is made or due under a plan maintained solely for the purpose of

complying with applicable

workmen's compensation, or unemployment compensation or disability

insurance laws; and

(iii) Hours of service are not required to be credited for a payment

which solely reimburses an employee for medical or medically related

expenses incurred by the employee.

For purposes of this paragraph (a)(2), a payment shall be deemed to be

made by or due from an employer regardless of whether such payment is

made by or due from the employer directly, or indirectly through, among

others, a trust fund, or insurer, to which the employer contributes or

pays premiums and regardless of whether contributions made or due to the

trust fund, insurer or other entity are for the benefit of particular

employees or are on behalf of a group of employees in the aggregate.

(3) An hour of service is each hour for which back pay, irrespective

of mitigation of damages, is either awarded or agreed to by the

employer. The same hours of service shall not be credited both under

paragraph (a)(1) or paragraph (a)(2), as the case may be, and under this

paragraph (a)(3). Thus, for example, an employee who receives a back pay

award following a determination that he or she was paid at an unlawful

rate for hours of service previously credited will not be entitled to

additional credit for the same hours of service. Crediting of hours of

service for back pay awarded or agreed to with respect to periods

described in paragraph (a)(2) shall be subject to the limitations set

forth in that paragraph. For example, no more than 501 hours of service

are required to be credited for payments of back pay, to the extent that

such back pay is agreed to or awarded for a period of time during which

an employee did not or would not have performed duties.

(b) Special rule for determining hours of service for reasons other

than the performance of duties. In the case of a payment which is made

or due on account of a period during which an employee performs no

duties, and which results in the crediting of hours of service under

paragraph (a)(2) of this section, or in the case of an award or

agreement for back pay, to the extent that such award or agreement is

made with respect to a period described in paragraph (a)(2) of this

section, the number of hours of service to be credited shall be

determined as follows:

[Harwood]

American Bar Assoc. - IRS Q&As May 9, 2003

28. §411(a) -Vesting Service Crediting Method

A profit-sharing plan covers only the salaried employees of a plan sponsor. A year of vesting service under the plan is credited for each plan year in which an employee is credited with at least 1,000 hours of service. Since all participants are salaried employees, actual hours of service are not tracked by the plan sponsor. Rather, the plan sponsor credits 40 hours of service for each week a salaried employee is employed. Is this a permissible method of crediting service?

Proposed response: No. If actual hours are not measured, one must credit hours based on an equivalency permitted under the regulations. However, under Labor Reg. §2530.200b-3, 40 hours per week is not a permitted equivalency. Rather, under subsection (e) of the regulations, the plan sponsor would be required to credit 45 hours of service for each week for which an employee would be required to be credited with at least one hour of service.

IRS response: The IRS agrees with the proposed answer. A sponsor cannot do "do-it-yourself" equivalencies. The DOL equivalency rules are the only permitted exception to counting hours for plans.

http://www.abanet.org/jceb/2003/qa03irs.pdf

[AndyH]

Thanks, Harwood. Interesting. But if someone salaried is expected to work 37.5 hours but is a workaholic, under what category (1), (2), or (3) would that be credited?

It is not paid, therefore it is not required to be credited, it seems to me.

And I do think I can find a counter Q&A that I read somewhere.

[MGB]

No matter how many hours they work "it is paid", although at a different hourly rate.

If hours are not tracked, they must get 45 (assuming the plan is using weekly equivalents), no matter how many hours (more or less) they actually work. If the plan is counting hours, then they get whatever they work (it is all paid, even if on a fixed salary).

You cannot jump back and forth and pick and choose, based on the current situation. The plan must specify what it is doing.

[AndyH]

Well, if that is true then I'll fold my cards.

The example I was thinking of relates to hours crediting for time paid while not performing services.

But I'll add that the ERISA Outline Book (at least an old edition that I am looking at) appears to support my argument that if pay is not determined on an hourly rate, but on a unit of time, then the number of hours "regularly scheduled" is relevant. But I don't see this in the DOL reg except under credit for time not worked.