Eligiblity & Vesting in a short plan year

[Guest siegek]

If I have a short plan year, say six months, do you half all hours requirements, 500 hours for eligiblity, 500 hours for vesting, etc. instead of 1,000. 250 to avoid a break in service, etc. I know compensation limits and 415 limits would be halfed, but deferral limit would not, $10,000 is for a calendar year, right? Thanks

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[Dan]

With regard to eligibility, a short plan year should have no bearing on it. If the eligibility is 1 year and age 21, then if these criteria are satisfied participation begins upon arrival at the next entry date.

Deferral limit is indeed based on a calendar year, so a short plan year has no effect on the annual deferral limit. Theoretically, a short plan year that crossed over two calendar years could accept $20,000 in deferred compensation.

Vesting is a little more complex to explain. To determine vesting service, service must be counted for a total of 12 months to determine if a year of vesting service is accrued during a short plan year.

So the entire short plan year and a portion of a full plan year are required to compute vesting service for the short plan year. The service worked during the full plan year will count towards vesting accrual twice. Once for the plan year actually worked and during the short plan year.

Suppose you have a short plan year from July 1, 1998 to December 31, 1998. Previously the plan year was July 1, 1998 to June 30, 1998. You must include service for the July 1, 1998 to December 31, 1998 period but you must also include service for the January 1, 1998 to June 30, 1998 period. If someone works 1000 hours during these two combined periods, they are credited with a year of vesting service during the short plan year.

Suppose someone works 950 hours during the short plan year, but did not work during the previous period, then he does not accrue a year of vesting service during the short plan year.

I believe break in service rules mirror vesting rules.

[This message has been edited by Dan (edited 03-06-99).]

[Chester]

I don't know if I entirely follow or agree with Dan's message, but here is how I administer short plan years: if the document provides that a year of service is earned when an employee works 1000 hours in a plan year, a short plan year of 6 months would provide an employee with a year of service if the employee worked at least 500 hours during this period.

[Guest Bill Mulkern]

If a plan requires 12 months or less of eligibility service, or less than 2 years but more than 1 year, should eligibility service be measured using the elapsed-time method, or is the standard 1,000 hours of service for a year of service pro-rated? If the latter, are breaks-in-service for eligibility rules adjusted accordingly? (Please also back up your answer with citations.)

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[Guest RARogers]

The rules don't allow you to measure vesting or eligibility service on a period less than 12 months - the idea is that a person who worked less than 500 hours in a six month period might have worked 1000 in a twelve month period.

The regulations provide a method (described above) for measuring service for vesting and eligibility on overlapping periods - this way service is measured on a 12 month period and there is no service that is not counted (and some is counted twice).

You can prorate the service requirement for allocation (benefit accrual) purposes.

[Guest Bill Mulkern]

Thanks, RAR Rogers, but which regs? I work with some attorneys who are of the opinion that hours-of-service requirements for an eligibility computation period of less than one year can indeed be pro-rated. But nobody can actually point to anything in ERISA, Code, Regs, etc. to back up this assertion. "It just makes sense," is the answer I get. But I get no reply when I ask about pro-rating break-in-service for eligibility. (The computation period for our prototypes is based on successive anniversaries of date of hire; the period does not switch to plan year.) I'm just trying to make the strongest case possible.

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[Dan]

That is an interesting interpretation. But this position seems difficult to support, given that plan eligibility is essentially independent of plan year and based solely on employment year.

[This message has been edited by Dan (edited 03-16-99).]

[John A]

The DOL Reg covering eligibility computation period is as follows:

§2530.202-2 Eligibility computation period.

(B) Eligibility computation periods after the initial eligibility computation period.

In measuring years of service for purposes of eligibility to participate after the initial eligibility computation period, a plan may adopt either of the following alternatives:

(1) A plan may designate 12-consecutive-month periods beginning on the first anniversary of an employee's employment commencement date and succeeding anniversaries thereof as the eligibility computation period after the initial eligibility computation period; or

(2) A plan may designate plan years beginning with the plan year which includes the first anniversary of an employee's employment commencement date as the eligibility computation period after the initial eligibility computation period (without regard to whether the employee is entitled to be credited with 1,000 hours of service during such period), provided that an employee who is credited with 1,000 hours of service in both the initial eligibility computation period and the plan year which includes the first anniversary of the employee's employment commencement date is credited with two years of service for purposes of eligibility to participate.

In the Journal of Pension Benefits Volume 4 Issue 3 Spring 1997, J. Michael Pruett writes: "For an employee within his or her initial computation period, a short plan year will have no effect on the determination of eligibility. If however, the subsequent eligibility computation period switches to the plan year and the initial computation period ends within the short plan year, it would appear that the eligibility requirements for the subsequent (and overlapping) computation period would be prorated. This position must be inferred because the Department of Labor requlations regarding eligibility computation periods do not consider short plan years. [see DOL Reg 2530.202-2(B)]"

Do you agree with J. Michael Pruett's position or do you disagree? Why? Thanks.

[Guest]

from the ERISA OUTLINE BOOK:

"the vesting computation period must run for a full 12 months, even when there is a short plan year. see tres reg 2530.203-2©. The 12 month computation period beginning on the first day of the short plan year will overlap with the next computation period measured on the basis of the new plan year period. The plan may NOT ust the short plan year period and prorate the hours of service requirement."

example that is given:

plan year 7/1 - 6/30

Martha is in her 4th vesting computation period which started 7/1/99.

effective 1/1/2000 plan is amended, creating a short plan year 7/1/99 - 12/31/99.

Martha's computation period will run from 7/1/99 - 6/30/00

and her 5th computation period will run

1/1/2000 - 12/31/2000.

[John A]

Tom, here is DOL Regulation 2530.203-2©(referenced by the ERISA outline book) in its entirety:

§2530.203-2 Vesting computation period.

© Amendments to change the vesting computation period.

(1) A plan may be amended to change the vesting computation period to a different 12-consecutive-month period provided that as a result of such change no employee's vested percentage of the accrued benefit derived from employer contributions is less on any date after such change than such vested percentage would be in the absence of such change. A plan amendment changing the vesting computation period shall be deemed to comply with the requirements of this subparagraph if the first vesting computation period established under such amendment begins before the last day of the preceding vesting computation period and an employee who is credited with 1,000 hours of service in both the vesting computation period under the plan before the amendment and the first vesting computation period under the plan as amended is credited with 2 years of service for those vesting computation periods. For example, a plan which has been using a calendar year vesting computation period is amended to provide for a July 1-June 30 vesting computation period starting in 1977. Employees who complete more than 1,000 hours of service in both of the 12-month periods extending from January 1, 1977 to December 31, 1977 and from July 1, 1977 to June 30, 1978 are advanced two years on the plan's vesting schedule. The plan is deemed to meet the requirements of this subparagraph.

(2) For additional requirements pertaining to changes in the vesting schedule, see section 203©(1) of the Act and section 411(a)(10) of the Code and the regulations issued thereunder.

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I see nothing in this reg. that requires a vesting computation period to change just because the plan year changes. I do see that using 2 12-consecutive month overlapping periods (one of which will be the new vesting computation period and one of which must be the old one that begins prior to the new period) is deemed to meet the requirements of how to change the vesting computation period if it is desired to change the vesting computation period. I do not see anything in the reg. that requires the use of the 12-consecutive month period starting on the first day of the short plan year as one of the 2 12-consecutive month overlapping periods. The example given in the reg. never mentions a short plan year, only a change in the 12-consecutive month vesting computation period. If there is a short plan year associated with the example in the reg., it could easily be either 7/1/77 -12/31/77 or 1/1/78 - 6/30/78. The important part seems to be that since the first vesting computation period established under the amendment is 7/1/77 - 6/30/78, the previous vesting computation period must be 1/1/77 -12/31/77.

----------------------------------- However, the ERISA outline book does bring up a point that I think may present some problems for some plans I've seen that grant a year of vesting service for any participant who works an hour in a short plan year. The provision would meet the requirement that "no employee's vested percentage ... is less on any date after such change than such vested percentage would be in the absence of such change." The provision might not meet the requirement of 2530.203-2 (a), which is as follows:

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(a) Designation of vesting computation periods.

Except as provided in paragraph (B) of this section, a plan may designate any 12-consecutive-month period as the vesting computation period. The period so designated must apply equally to all participants. This requirement may be satisfied even though the actual 12-consecutive-month periods are not the same for all employees (e.g., if the designated vesting computation period is the 12-consecutive-month period beginning on an employee's employment commencement date and anniversaries of that date). The plan is prohibited, however, from using any period that would result in artificial postponement of vesting credit, such as a period measured by anniversaries of the date four months following the employment commencement date.

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This would seem to require any vesting computation period to run for 12 consecutive months as implied in your quote from the ERISA outline book. I am not sure the DOL would object to the provision granting a year of service for anyone with an hour in the short plan year as it seems more generous than the overlapping periods, but the provision does seem to conflict with 2530.203-2(a).

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I am curious as to why the ERISA outline book is so emphatic about not being able to use the short plan year period and prorate the hours, as that view (even though I agree with it) is not supported by the 2530.203-2© reg. that is cited. Is the emphasis due to informal guidance received at meetings, to part (a) of the reg. cited, or just to their own position? Does anyone know if prorating hours in a short plan year was acceptable at some time (perhaps prior to the DOL reg being effective)? I seem to recall some old plans that did contain the prorate language.

[Guest]

to get credit for vesting, one must complete a 'year of service'

411(a)(5)(A) defines year of service as "a calendar year, plan year, or other 12 consecutive month period defined by the plan"

ERISA code 203(B)(2)(a) contains the same language.

all that being said, I know years ago I worked on a plan that had a short plan year, with an amendment giving vesting credit for the short period, and must have gotten IRS approval because there was a determination letter. so much for consistency.

obviously a plan could require less than 1000 hours, but...

anyway, I remember this issue being raised last year at one of the ASPA meetings last years, and I didn't believe it then 'cuz no reg cite was noted.

heck, if you are going to the ASPA conference this year maybe we can grumble over this over lunch or something...

[John A]

I won't be at ASPA 1999, but maybe ASPA 2000?

[Dowist]

The prohibition against measuring a year of service on less than a 12 month period is to protect pts against a plan change that would result in part of their service not being counted.

Suppose you had an employee who was part-time except from November through January (Christmas season) when he worked full-time. Overall he always works 1000 hours in a calendar year, but most of it in those 3 months. Say you go from a calendar year to a July to June year effective June 30, 1999. If you were able to prorate the service requirement for the short year, he would not get a year of service because he doesn't have 500 hours of service through June. Now suppose he quits on December 31, 1999 - he has 1,000 hours in the 1-1-99 to 12-31-99 period, but he doesn't have 1000 hours in the July 1999 to June 2000 year. If you had been allowed to prorate he would get no years of service for the period Jan 1999 through Dec. 1999. If you follow the ERISA and IRS rules requiring overlapping periods, he'd have 1 year of service.