Break in Service Question

[SteveH]

Takeover plan. Plan document allowed everyone hired as of 12/31/2003 to enter the plan.

There is a NHCE (hired prior to 12/31/2003) that typically works 9 hours a week. I have been told the employee will never work 1000 hours so will never actually accrue a benefit. He has never worked over 500 hours during a plan year either.

In my opinion this person is a participant in the plan because of the eligiblity language above. Once a participant - always a participant, right? This means I must include him in my general testing as eligible but not benefiting. Basically he gets a big fat ZERO and brings down my NHCE averages.

BUT

I was reading the plan document and in the 1-Year Break in Service definition it specifically says, "An Employee or Former Employee that works less than 500 hours in a plan year..." It rambles on some more, but the fact that it says an Employee is throwing me off. Does this mean that my NHCE has a break in service? Is he not included in the testing?

Now maybe I am reading this too literally. Maybe a person is considered an Employee the year that he terminates and can incur a break in service, and a former Employee is someone that terminated in a previous year that has no hours and incurs a break in service. So there is no way for an active employee to incur a break in service unless they terminate. There isn't such a thing as a "deemed termination" because the employee isn't working very much is there?

Tell me that I am over analyzing. Tell me that he is a participant and has to be included in the test forever until he is terminated. Tell me I can go back to surfing the internet!! The MLB playoffs have started. The NBA has started training camp. Not to mention all of the bad stuff happening in schoolsThere is a lot of news to be read.

[Belgarath]

"Tell me that I am over analyzing. Tell me that he is a participant and has to be included in the test forever until he is terminated. Tell me I can go back to surfing the internet!!"

Dude, surf's up - go hang ten.

[Guest Pensions in Paradise]

This is apples and oranges. The break in service rules affect eligibility and vesting for rehires.

As long as the employee is employed he must be included in your testing since he is already a participant in the plan. Once he terminates the break in service rules kick in.

And yes, an active employee can incur a break in service. The ERISA Outline Book has a thorough discussion on this topic.

[SteveH]

I was worried about the apples and oranges thing. Seriously. I have always gone by that phrase, once a participant always a participant until termination, but it got a little foggy there for a bit. Thanks for the clarification.

[david rigby]

But be careful about minimums. Some DB plans have a minimum benefit, such as $20 per month. If this EE continues to work 9 hours a week until NRA, he may be eligible for something.

[FormsRstillmylife]

We recognized similar odd wording in our document when we were doing our EGTRRa rewrite and cleaned it up to read the way we were administering.

A participant shall continue to be an active participant of the plan so long as he is a member of the eligible class of employees and he does not incur a one-year break in eligibility service due to termination terminate of employment. He shall become an inactive participant when he incurs a one-year break in eligibility service due to termination terminates of employment, or at the end of the plan year during which he ceases to be a member of the eligible class of employees, or at the end of the plan year during which he incurs a one-year break in service. He shall cease participation completely upon the later of his receipt of a total distribution of his nonforfeitable accrued benefit under the plan or the forfeiture of the nonvested portion of the accrued benefit.

[Blinky the 3-eyed Fish]

A BIS for an active employee excludes them from being an active participant in the plan for all purposes, INCLUDING nondiscrimination testing. Of course, if they satisfy the requirements to be reinstated and therefore enter the plan retroactively, they can too retroactively affect the nondiscrimination testing that occurred. This is one of the inherent problems with having BIS rules in a plan.

That "once a participant, always a participant" line is not true.

[Guest Pensions in Paradise]

Sorry Blinky. You must be getting senile in your old age. (Wait, today your profile says you're only 38! Yesterday you were 94. Hmmm)

If a participant has less than 500 hours but is still employed on the last day of the plan year you DO include them in your testing.

Unless there is a special rule I don't know about. Which is probably the case. Can you provide a cite which supports your statement that "a BIS for an active employee excludes them from being an active participant in the plan for all purposes, INCLUDING nondiscrimination testing."

[SteveH]

Well in some research I was doing I noticed that you can use a lower hours threshold in the plan for the BIS, and even none at all, but I think that is going to make it a custom document.

[Blinky the 3-eyed Fish]

PIP,

Here is 410(a)(5)©:

In computing an employee's period of service for purposes of paragraph (1) in the case of any participant who has any 1-year break in service (as defined in section 411( a )(6)( A )), service before such break shall not be required to be taken into account under the plan until he has completed a year of service (as defined in paragraph (3)) after his return.

Note that YOS for eligibility are not taken into account if someone has a BIS. Thus it is considered as if the person with the BIS has not met the eligibility requirements of the plan. 410(b) of course allows employees who haven't met the eligibility requirements to be excluded from testing. 401(a)(4) and 410(b) have the same excludables.

There you go.

The hole in your argument is that the person is not an active participant any longer and therefore it doesn't matter if they are employed on the last day of the year, much like it doesn't matter if the person who hasn't met the eligibility requirements is employed on the last day of the year.

[Guest Pensions in Paradise]

Wow, thats an interesting concept there blinky. One problem with your cite though. What do the last three words of 410(a)(5)(c ) say? "AFTER HIS RETURN" Which implies the employee must have terminated in order for this to apply.

I really hope you aren't administering plans or advising clients to exclude active participants once they drop below 500 hours.

[SoCalActuary]

A DC plan with a last day requirement is different from a DB plan with a 500 hour requirement. I don't believe DB plans require an accrual or continuing credits for less than 500 hours worked unless the plan uses the elapsed time method or has special language lowering the hours requirement.

I do indeed administer DB's where the employees under 500 hours are not credited with any service, vesting or accrual for the year, regardless of last day.

I also exclude them from testing. If I look hard enough, there is a cite on this in the non-discrimination reg's.

[Blinky the 3-eyed Fish]

PIP, you could really lose the condescending attitude.

Here is 411(a)(6)(a) referenced in my cite:

(6) Breaks In Service

(A) Definition Of 1-year Break In Service

For purposes of this paragraph, the term "1-year break in 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 not completed more than 500 hours of service.

(B) 1 Year Of Service After 1-year Break In Service

For purposes of paragraph (4), in the case of any employee who has any 1-year break in service, years of service before such break shall not be required to be taken into account until he has completed a year of service after his return.

That cite uses the phrase you hold onto, yet we KNOW it applies to active people with a BIS. Therefore, you are quite clearly misconstruing its meaning. Next thing you know because it says "his", you will say it doesn't apply to women.

[Mike Preston]

It really is lazy language. "after his return" should maybe have been "after such break". The writer was trying too hard not to be redundant. Redundancy is sometimes a good thing. Redundancy is sometimes a good thing.

The language in question seems to define what happens with respect to periods AFTER the break in service. It doesn't say too much about the period DURING WHICH a break is taking place.

While I agree there are exceptions, if an individual is a participant in a plan and the individual is not a terminated employee, then the number of hours worked is not going to impact whether that employee continues as a participant. The number of hours may dictate whether that individual is eligible to receive an allocation or an accrual, though.

There is some history on this, I imagine, although I can't remember precisely what it is. Older plans (pre-TRA) used to define active participation and inactive participation. Something must have changed with TRA, although, as I said, I can't put my finger on it at the moment.

My guess is that PIP's position is the one that the IRS would take without clear language to the contrary in the plan itself.

[Blinky the 3-eyed Fish]

I am talking about the period after the break in service. The original post's example participant would have had a BIS by now.