Break In Service Rules

[Guest PBJ]

Here are the facts: An employee terminates at the end of Year 1. Five months later in June of Year 2 he is rehired and comes back to work. However, he only works during the summer months and he works less than 500 hours. This pattern continues for years. Essentially, he only works from June through August. He never works more than 500 hours.

A Profit Sharing Plan states that a break in service occurs when an employee is credited with less than 501 hours of service in an eligibility computation period (January 1 to December 31). If an employee is rehired before a break in service then he becomes a participant on the date of reemployment. If he is rehired after a break in service he becomes a participant once he completes a year of service (i.e., 1000 hours of service).

Did this employee have a break in service before he was rehired?

Any ideas of when this employee gets back into the plan, if at ever?

[J Simmons]

Was the EE eligible for the plan before terminating at the end of Year 1? Does the plan require two years of service for eligibility? Did the EE have any vested benefits at the time of terminating at the end of Year 1?

Even knowing the answers to these three questions, the answer you seek will depend on a very close reading of numerous plan provisions.

[Guest PBJ]

The employee had been participating in the plan for a very long time and was fully vested. The plan requires a year of service in order to be eligible. Any additional help would be great.

[Mike Preston]

Seems like the answer is an obvious one. He was a long time participant as of the end of Year 1 (boy, is that a poor choice of numbers). He terminates at the end of year 1. Before a full year goes by, he is rehired. Since it is fundamentally impossible for this individual to have incurred a break, as of the date he is rehired, he is immediately eligible to participate in the plan. He is a participant until he again terminates before the end of the year. This time, however, as of the end of the year, he has less than 500 hours. Now, at the end of Year 2, he has incurred a BIS.

He is now hired again at some point in Year 3. Having incurred a BIS in year 2 he does not enter the plan until again working a year with more than 1000 hours. So he never gets back in the plan.

What have I missed?

[PLAN MAN]

Are there any salary deferrals to consider or is this a straight profit sharing only plan? Is the plan top-heavy?

These are things to consider.

[Guest PBJ]

Thanks for the responses. This is a straight profit sharing plan. The Plan is top-heavy each year. The employee in question was a highly compensated employee not sure if he still would be considered as such, I don't know what he makes in three months. And I am not sure of his ownership percentage, if any. But I will gather more facts to determine the impact if the plan was top-heavy during those years.

[PLAN MAN]

This situation seems to be the type for which the hold-out rule under the break in service rules is designed. The plan is allowed to temporarily ignore the employee's prior service until that employee earns a year of service after their break in service. Once the employee earns the year of service they would be reinstated in the plan as of the first day of the eligibility computation period in which they were credited with the year of service. This retroactive reinstatement can be difficult to administer.

I asked if the plan was top-heavy, because the difficulity arises when an employee is reinstated back to the previous plan year and they are due a top-heavy contribution for that year.