Eligibility based on elapsed time

[Guest Cyndy]

I am aTPA - I have prospective client interested in adopting a profit sharing plan and we have a little trouble in determining eligibility criteria. All our plans thusfar have based criteria on hours worked (i.e., 100 hours = 1 year of service), but this company sells carpeting and the majority of the employees are carpet layers. They do not work according to a regular schedule and are paid by the job rather than the hour. We cannot assign a set number of hours worked to each employee.

How do we determine who has a year of service (1,000 hours), or does anyone have any ideas on how we might instead set criteria on an elapsed time basis and how would that work?

Appreciate any input - thanks.

[Guest ERead]

You may want to consider an equivalent basis. I had a transportation company (bus drivers paid by the mile) - we credit each drive 10 hours for each day they actually work. You can also go in weekly, semi-monthly and monthly rates - each document provider has different provisions.

If you go with the elapsed time method - I think your going to be crediting people with more time than the client would want. I have always pushed for equivelent vs. elasped when trying to bring a new client on board.

Good luck - hope this helps.

[richard]

The IRS (or Dept of Labor, I forget) allows plan sponsors who use an hours of service eligibility (such as 1,000) hours to use an equivalency instead of actually counting hours.

The equivalencies are quite generous (I think they are 10 hours per day worked, 45 hours per week worked, 180 hours--I'm not sure--- per month worked). I'm also not sure how the equivalencies are calculated for partial periods; for example, if an employee works part of a week, is he credited for 45 hours nonetheless.

If you want to use the equivalency method of hours of service, the plan must specify which method you will be using [10(?) hours per day, 45(?) hours per week or 180(?) hours per month].

As long as your client knows which days and employee worked (and I hope they know that!), the equivalency method shouldn't be too bad.

The problem with the elapsed time method is an employee never is truly gone unless he doesn't work for a 12 consecutive month period. If a carpet layer works very sporadically but never completely leaves the company, he keeps getting years of service.

The same problem with elapsed time applies to what I call "permanent part-time workers." A part-time employee who works 1 day per week (for example) would be credited with roughly 400 hours per year if actual Hours of Service were used (500 hours per year if Hours of Service with daily equivalencies), and would never enter a plan with a 1,000 hour requirement. If elapsed time were used, he would enter the plan after one year of employment, even though that one year consisted of one day per week for 52 weeks. If you are also using elapsed time for "Year of Service" for allocation and for vesting (the reason you didn't use Hours of Service for eligibility would most likely be the same reason you wouldn't use it for allocation and vesting), he would receive an allocation and ultimately become vested. Of course, his allocation would be small because his salary would be small, but he would have to be included.

So, consider Hours of Service using Equivalencies.

[Guest carsca]

Regarding the part-timer under the elapsed time method, is there an argument that he shouldn't enter the plan (or, for vesting, not receive vesting service) since elapsed time requires "whole years?" In this case, assuming the part-timer's one workday does not fall on December 31st, the part timer arguably did not complete a "whole year."

Any thoughts?

[Guest Jeff V]

carsca,

i believe under the elapsed time method, actually working has no relevance. the eligibility (and vesting for elapsed time vesting method) are determined by hire date and current date, and whether the employee is "employed", not whether they worked.