Past Service

[k man]

i have an employer (a law firm) that is adding a new partner. they want to credit this employees past service with another employer. they have never done this before. is this discriminatory per se or can a case be made since there are no other NHCEs and there is a valid business purpose it would be ok.

[JanetM]

Why not just amend the plan to eliminate eligibility and vesting schedule.

[Mike Preston]

It certainly can be done. The only issue is one of discrimination. If, as you say, there are no NHCE's, then all is well. If there are NHCE's, then at the least, service with THAT employer would need to be credited to all in order to avoid the non-discrimination issue entirely. There are some pretty complicated rules dealing with the crediting of service with other organizations, related or not, in the 401(a)(4) regs somewhere, I think.

[k man]

It certainly can be done. The only issue is one of discrimination. If, as you say, there are no NHCE's, then all is well. If there are NHCE's, then at the least, service with THAT employer would need to be credited to all in order to avoid the non-discrimination issue entirely. There are some pretty complicated rules dealing with the crediting of service with other organizations, related or not, in the 401(a)(4) regs somewhere, I think.

there are NHCEs in the plan of course. just none they are bringing in due to the service credit. we dont want to amend the plan's eligibility. that would allow all new employees into the plan in the future. that is not what they want.

[jpod]

I'm afraid I don't have the time or the inclination to study the 401a4 regs. for you, but I can't believe that this fact pattern escapes the regs. alive. You would not really be granting "past service;" you would be waiving the eligibility service and vesting service requirements, or liberalizing them, for a single HCE. I'm not sure if it is a BRF problem or another problem, but it's got to be a problem. Sorry I cannot be more helpful.

[Mike Preston]

I agree with jpod. But it seems to me there are two levels of analysis one must satisfy:

1) Is the specific grant of past service (e.g., to all those employed by our esteemed rival Dooie, Cheatum and Howe, LLC we credit their service for eligibility purposes with respect to hours worked in 2006 and forward) discriminatory

2) Is the general grant of past service (e.g., we are granting past service to a group of people)

Now, the issue is a bit cumbersome and may just provide a path through the thicket, but not without the expert guide services of an ERISA attorney.

Why? Because if this law firm is big enough, then the individual joining the plan will not be an HCE at the point in time (or for the plan year during which) the past service is granted. If the person is an HCE for the given year it is a bit more challenging. That is not to say that if the person is NOT an HCE it is not challenging at all. I predict that the next big item on the IRS' agenda may very well be retroactive analysis of discrimination with respect to first year employee participants. But I'm hopefully wrong on that.

[jpod]

Interesting point about the partner not necessarily being a HCE in his/her first year with the firm (assuming he/she is not a 5% owner). I didn't think about that.

I am assuming, although I don't know why, that this is a DC plan. Query, could you amend the plan to let this individiaul participate in the first year, and even provide for the full 415 contribution for the first year (if that's what he has negotiated), and then hold him out of the plan after the first year until he satisfies the plan's normal eligibility rule, and thereafter let him participate on the same basis as everyone else? Is the timing of this amendment discriminatory under the regs (because of the high likelihood that he will become an HCE in the future)? Food for thought.

Even if you can do something like I've proposed vis a vis eligibility, I'm not sure how you give this individual service credit for vesting without a discrimination problem, because accelerated vesting will have an effect in subsequent years when he is an HCE.

[BG5150]

Are there any NHCE's coming to this plan from that other employer? If not, what's stopping an amendment allowing past service with the other ER? Then do another amendment 1 mos down the line rescinding it.

Something like:

Amendment 1: Effective 4/1/08 (date this new person is hired), all service with XYZ company shall be credited.

Amendment 2: Effective 5/1/08, EE's hired after effective date service with XYZ company shall not be considered.

Shouldn't be a problem if they aren't considering hiring any NCHE's from XYZ for a while.

[Mike Preston]

Interesting point about the partner not necessarily being a HCE in his/her first year with the firm (assuming he/she is not a 5% owner). I didn't think about that.

I am assuming, although I don't know why, that this is a DC plan. Query, could you amend the plan to let this individiaul participate in the first year, and even provide for the full 415 contribution for the first year (if that's what he has negotiated), and then hold him out of the plan after the first year until he satisfies the plan's normal eligibility rule, and thereafter let him participate on the same basis as everyone else? Is the timing of this amendment discriminatory under the regs (because of the high likelihood that he will become an HCE in the future)? Food for thought.

Even if you can do something like I've proposed vis a vis eligibility, I'm not sure how you give this individual service credit for vesting without a discrimination problem, because accelerated vesting will have an effect in subsequent years when he is an HCE.

As far as food for thought goes, I think if the individual is not an HCE at the time that the benefit is being provided that it would be very, very difficult for the IRS to claim that there is prohibited discrimination. Even if that extends to a period of time after which the individual is an HCE. Hence, theoretically, anyway, if the individual's vesting percentage was enhanced due to something which took place while the individual was an NHCE it would be similarly difficult to press for a charge of prohibited discrimination.

With that said, these sorts of dances are best done with an ERISA attorney (although that conjures up an image that is most disturbing!).