Crediting Service On An Aggregate Basis

[Guest caddieadmin]

A while back I posted a question about different ways to credit service so I could get a good sense of my limitations, because the business I'm working with doesn't utilize a cut-and-dry hourly or salary wage situation.

After much consideration, I'd determined that I wanted to use an equivalency method where the total wages earned in a Plan Year are divided by the lowest hourly wage earned, thereby giving you total hours of service for the year.

Because of the transient nature of the company, I was hoping that it would be possible to calculate hours earned on an aggregate basis. For example, if we're using a 2-year cliff and are requiring 1000 hours of service per year, then after two years you need to earn at least 2000 hours to be fully vested. On an aggregate basis, that means an employee could earn 600 hours the first year and 1400 hours the second year and become 100% vested. Also, if an employee could only earn 200 hours a year (assuming the plan has a lenient break in service rule where an employee needs to earn at least 100 hours of service to avoid a break in service), then that employee would be fully vested after 5 years. If the aggregate rule wasn't used, an employee earning only 200 hours a year would never become 100% vested.

I was recently on a conference call with a vendor and they explained that counting hours earned on an aggregate basis was not allowed by the IRS. Plans can only count hours year by year, and they can never be combined. I could be wrong (and please tell me if I am), but I thought that even if there wasn't anything in the IRC specifically saying this was okay, the fact that the plan is more in favor of the employees in this particular situation would mean it could be used.

Is this aggregate rule okay? Are there any IRC references that anyone can give me that I can show these vendors to convince them otherwise?

Unfortunately, using this aggregate rule is quite important to the overall mechanics of the plan. I would very much like to find a way to do this if possible.

Any and all help would be greatly appreciated. Thanks so much guys.

[Mike Preston]

Of course you can credit vesting faster than the statutory and regulatory minimums. Can you demonstrate to the vendor that your methodology will always result in more favorable vesting? If so, you should be fine.

Of course, if somebody other than you is responsible for calculating the vested percentage, there will be programming roadblocks to implementation. Throw enough $$ at the problem, though, and you should be fine.

[PLAN MAN]

For example, if we're using a 2-year cliff and are requiring 1000 hours of service per year, then after two years you need to earn at least 2000 hours to be fully vested. On an aggregate basis, that means an employee could earn 600 hours the first year and 1400 hours the second year and become 100% vested. Also, if an employee could only earn 200 hours a year (assuming the plan has a lenient break in service rule where an employee needs to earn at least 100 hours of service to avoid a break in service), then that employee would be fully vested after 5 years.

Doesn't the Code define a vesting computation period as a 12-consecutive month period in section 411? I don't see how you can get around that requirement and count hours over a larger period of time. Also, how do you explain the employee being fully vested after 5 years when being credited with 200 hours per year (200 x 5 = 1,000)?

It looks to me the only way to count time without any hours requirement is to use elaspsed time. As long as an employee stays employed they would earn vesting credit each year.

[Guest caddieadmin]

The 5 years at 200 hours per year was just a mathematical error. I was writing my question rather quickly because the vendor I was speaking with threw me off and I was just dying for an answer. For some reason I had always believed that I might be able to calculate vesting on an aggregate basis in order to give those employees earning under 750 hours per year a chance to become 100% vested at some point. The vendor I was speaking with threw me off when he concurred with you about the vesting period being a 12 month period. It's one of those things I had always read and felt I understood, I was just trying to see if I could be a little more lenient.

Back to the drawing board. I'll look into that reference immediately to see if there's some other way I might be able to accommodate the part-timers.

Thanks again guys.

[BG5150]

Equivalency method doesn't count actual hours, so no need to divide comp by hourly wage. It grants certain number of hours for a given number of days of service.

For example, with the equivalency method, an EE would receive these amounts of hours for these amounts of service:

10 hours for each day they are credited with at least one hour of service (basically for each day they work)

45 hours for each week

190 hours for each month

Could you do it that way?

[Guest caddieadmin]

I've looked into that crediting method before, but it's been awhile so I was wondering if you could answer a few questions I had about it.

1. What is the bi-weekly equivalency? Is it 90 or is it something else?

2. I've heard from a few people on here that as far as the IRS is concerned, if an employee racks up 750 hours in a plan year, it's the same as if that person had earned 1000. So even if in the plan document you're requiring 1000 hours of service for a year of vesting, if an employee earns 750-999 hours it's the same as 1000?

3. Do these equivalency values (45 hours for a week, 190 hours for a month, etc) correlate/interrelate with employee wages? By that I mean, by granting 45 hours a week, does this now mean that the employee is entitled to overtime payment for their services?

That last one sounds stupid but I just wanted to make sure because that was one of the main turn-offs to this equivalency method when I was going over the options with my employer.

As always, thanks for the help guys.

[Guest Pensions in Paradise]

In reviewing your prior posts it appears that you have spent 10 months attempting to "put together" a 401(k) plan for your company. PLEASE PLEASE PLEASE just call a TPA in your area and meet with them for one hour. I guarantee you that the TPA can accomplish more for you in one hour than you will be able to accomplish yourself in one year. If I'm wrong I'll buy you a beer (or other beverage of your choosing).

[Guest caddieadmin]

In reviewing your prior posts it appears that you have spent 10 months attempting to "put together" a 401(k) plan for your company. PLEASE PLEASE PLEASE just call a TPA in your area and meet with them for one hour. I guarantee you that the TPA can accomplish more for you in one hour than you will be able to accomplish yourself in one year. If I'm wrong I'll buy you a beer (or other beverage of your choosing).

With all due respect, I AM currently in the process of working with a TPA. I am TRYING to let somebody else do this for my company. I am NOT doing this on my own anymore, because I realize the complexity of the task. The questions I'm asking now are merely to help me express to the TPA how I believe the 401k should work so as not to screw my company over in the future, because this is not a typical prototype plan and many of the TPA's suggestions thus far have not been helpful (because they don't know the business I'm in and I've had to guide them in many respects).

I have a great respect for you and everyone else in this forum. I have always tried to ask my questions intelligently and use as few words as possible so as not to waste your time. I apologize if these questions seem remedial, but now I'm starting to work towards a deadline and I'm paying less attention to how I sound in here because I just need some help. So please. Answer my previous questions if you know the answers.

And yes, for the last 10 months I have "attempted to put together" a 401k because I literally started from scratch, not knowing a thing about the industry. If I had known what I know now, perhaps I would've done a few things differently, but overall I would've spent just as much time trying to learn as much as I possibly could because again, a simple prototype plan would not have worked for the company I work for and I needed to know some of my limitations for what I could and could not do with a 401k.

After reading your response, regardless of how hard I tried, I couldn't help but feel like you were talking down to me. Perhaps I'm wrong, but as you noticed, I've been at this for way too long with minimal help and at this point, I'm tired of people telling me that I'm incapable of doing this. I get it. I'm working with a TPA now. Now I'm just trying to finish it. So help me if you can.

[PLAN MAN]

Copied from www.dol.gov:

29 CFR 2530.200b-3 - Determination of service to be credited to employees.

(a) General rule. For the purpose of determining the hours of service which must be credited to an employee for a computation period, a plan shall determine hours of service from records of hours worked and hours for which payment is made or due or shall use an equivalency permitted under paragraph (d), (e) or (f) of this section to determine hours of service

(f) Equivalencies based on earnings.

(1) In the case of an employee whose compensation is determined on the basis of an hourly rate, a plan may determine the number of hours to be credited the employee in a computation period on the basis of earnings, if:

(i) The employee is credited with the number of hours equal to the total of the employee's earnings from time to time during the computation period divided by the employee's hourly rate as in effect at such times during the computation period, or equal to the employee's total earnings for the performance of duties during the computation period divided by the employee's lowest hourly rate of compensation during the computation period, or by the lowest hourly rate of compensation payable to an employee in the same, or a similar job classification, reasonably defined; and

(ii) 870 hours credited under paragraph (f)(1)(i) of this section are treated as equivalent to 1,000 hours of service, and 435 hours credited under paragraph (f)(1)(i) of this section are treated as

equivalent to 500 hours of service.

For purposes of this paragraph (f)(1), a plan may divide earnings at premium rates for overtime by the employee's hourly rate for overtime, rather than the regular time hourly rate.

(2) In the case of an employee whose compensation is determined on a basis other than an hourly rate, a plan may determine the number of hours to be credited to the employee in a computation period on the

basis of earnings if:

(i) The employee is credited with the number of hours equal to the employee's total earnings for the performance of duties during the computation period divided by the employee's lowest hourly rate of

compensation during the computation period, determined under paragraph (f)(3) of this section; and

(ii) 750 hours credited under paragraph (f)(2)(i) of this section are treated as equivalent to 1,000 hours of service, and 375 hours credited under paragraph (f)(2)(i) of this section are treated as

equivalent to 500 hours of service.

(3) For purposes of paragraph (f)(2) of this section, an employee's hourly rate of compensation shall be determined as follows:

(i) In the case of an employee whose compensation is determined on the basis of a fixed rate for a specified period of time (other than an hour) such as a day, week or month, the employee's hourly rate of

compensation shall be the employee's lowest rate of compensation during a computation period for such specified period of time divided by the number of hours regularly scheduled for the performance of duties during such period of time. For purposes of the preceding sentence, in the case of an employee without a regular work schedule, the plan may provide for the calculation of the employee's hourly rate of compensation on the basis of a 40-hour workweek or an 8-hour workday, or may provide for such calculation on any reasonable basis which reflects the average hours worked by the employee over a representative period of time, provided that the basis so used is consistently applied to all employees

within the same job classifications, reasonably defined.

(ii) In the case of an employee whose compensation is not determined on the basis of a fixed rate for a specified period of time, the employee's hourly rate of compensation shall be the lowest hourly rate

of compensation payable to employees in the same job classification as the employee, or, if no employees in the same job classification have an hourly rate, the minimum wage as established from time to time under section 6(a)(1) of the Fair Labor Standards Act of 1938, as amended.

(4) Examples.

(i) In a particular job classification employees' wages range from $3.00 per hour to $4.00 per hour. To determine the number of hours to be credited to an employee in that job classification

who is compensated at a rate of $4.00 per hour, a plan may divide the employee's total earnings during the computation period for the performance of duties either by $3.00 per hour (the lowest hourly rate

of compensation in the job classification) or by $4.00 per hour (the employee's own hourly rate of compensation).

(ii) An hourly employee's total earnings for the performance of duties during a vesting computation period amount to $4,350. During that calendar year, the employee's lowest hourly rate of compensation was $5.00 per hour. The plan may determine the number of hours to be credited to the employee for that vesting computation period by dividing $4,350 by $5.00 per hour. The employee is credited with 870 hours for the vesting computation period and is, therefore, credited with a year of service for purposes of vesting.

(iii) During the first 3 months of a vesting computation period an hourly employee is paid at a rate of $3.00 perhour and earns $675 for the performance of duties; during the next 6 months, the employee is paid at a rate of $3.50 per hour and earns $1,575 for the performance of duties; during the final 3 months the employee is paid at a rate of $3.60 per hour and earns $810 for the performance of duties. The plan may determine the number of hours to be credited to the employee in the computation period under the equivalency set forth in paragraph (f)(1) of this section either (A) by dividing the employee's earnings for each period during which the employee was paid at a separate rate ($675 divided by $3.00 per hour equals 225 hours; $1,575 divided by $3.50 per hour equals 450 hours; $810 divided by $3.60 per hour equals 225 hours) and adding the hours so obtained (900 hours), or (B) by dividing the employee's total compensation for the vesting computation period by the employee's lowest hourly rate during the computation period ($3,020 divided by $3.00 per hour equals 1,009\2/3\ hours). The plan may also divide the employee's total compensation during the computation period by the lowest hourly rate payable to an employee in the same, or a similar, job classification.

(iv) During a plan's computation period an hourly employee's total earnings for the performance of duties consist of $7,500 at a basic rate of $5.00 per hour and $750 at an overtime rate of $7.50 per hour for hours worked in excess of 40 in a week. If the plan uses the equivalency permitted under paragraph (f)(1) of this section, the plan may adjust for the overtime rate in calculating the number of hours to be credited to the employee. Thus, the plan may calculate the number of hours to be credited to the employee by adding the employee's earnings at the basic rate divided by the basic rate and the employee's earnings at the overtime rate divided by the overtime rate ($7,500 divided by $5.00 per hour, plus $750 divided by $7.50 per hour, or 1,500 hours plus 100 hours), resulting in credit for 1,600 hours for the computation period.

(v) During a plan's vesting computation period an employee's lowest weekly rate of compensation is $400 per week. The employee has a regular work schedule of 40 hours per week. The employee's lowest hourly rate during the vesting computation period is, therefore, $10 per hour ($400 per week divided by 40 hours per week). During the vesting computation period, the employee receives a total of $7,500 for the performance of duties. The plan determines the number of regular time hours to be credited to the employee for the computation period by dividing $7,500 by $10 per hour. The employee is credited with 750 hours for the computation period and is, therefore, credited with a year of service for purposes of vesting.

I hope this helps.

[Guest Pensions in Paradise]

Hopefully Plan Man's post has provided you the information you need.

I won't beat this to death, but if you do not feel comfortable with your current TPA, might I suggest finding a more qualified TPA. It is clear that your current TPA is not providing you with sufficient advice.

And just to make sure we are talking about the same thing, you are working with an independent third-party administrator correct? And not a bundled provider or a TPA who only works with a bundled provider?

The reason I ask is that some of your comments lead me to believe you are dealing with a bundled provider. Unfortunately they are not the best source of advice. Based on the level of customization that you require, you should be working with an independent TPA and an ERISA attorney to draft your plan document. You definitely shouldn't be using a prototype document.

[wsp]

First, I applaud your efforts in trying to learn...but I think you're focusing too narrowly on the vesting in terms of how to provide a benefit.

Might be alternative routes to take if we knew what it was that you're looking to accomplish here. Who exactly is it that you're trying to benefit? And what type of contribution are you looking at providing? Profit Sharing? Match? What's the point of providing that employer contribution? Recruitment? Retention? Reward?

Are you trying to provide full benefit to the bottom tier employees or the top tier? How long does the bottom tier typically stay on with you in terms of hours per year and years of employment? How long does the top tier stay in terms of hours per year and years of employment.

And, the advice about seeking an independent TPA is spot on. The bundled provider or TPA that works solely with the bundled providers often will steer you towards solutions that fit their systems rather then what you want to accomplish. Those type of shops are for the most part designed around the "vanilla" plans that revolve around processing instead of consulting. If your current TPA fits that model, or is not working out, better to pay up on the bill and part ways rather than feel like you've been pigeon-holed into a plan that you don't want or doesn't fit your company's needs. This is especially true if you find what you're looking for on this board rather than from him/her.