Plan provision re disregard of service for vesting purposes

[chris]

I know it's implied, but is there anything in black and white stating that the plan document must set forth the service which will be disregarded? Regs say "shall" take into account, but "may disregard the following service"..... So the implication is that if it's not in the document as being disregarded then it's counted. Just wanted to know if there was a positive statement in print to that effect??

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[david rigby]

Internal Revenue Code section 411 establishes minimum standards for vesting. All qualified plans must adhere to these minimums, but the plan can be more generous. For example, sec. 411(a)(d)(4) permits the exclusion of service before age 18 in the determination of vesting service. The plan is not required to have that exclusion.

Thus, the Plan must set forth the vesting schedule and the definition of vesting service, both with concern for minimums established in IRC 411.

[chris]

Thanks, PAX.

More generous is not the problem. I've got a hospital that's telling me that a former employee is not entitled to any benefits under its DB plan established in 1968 because the individual does not have 10 years of continuous service. The individual worked there from 1957 through 1974 and then again from 1976 through 1979.

The plan doc in effect prior to Jan 1, 1976, said that an employee who worked for the hospital five years as of Jan 1, 1968 would be eligible to be a participant in the DB plan. The section regarding vesting only says that a participant must be age 55 and have 10 years of service with the hospital to receive a vested benefit.

The DB plan was amended effective Jan 1, 1976 purportedly to comply with ERISA. That doc defines credited service as any service after the later of age 25 or date of hire but in any event not to exceed 35 years. The doc has one sentence that states that credited service prior to Jan 1, 1976 will be computed under the plan document then in effect. That's it, no provisions regarding exclusion of service as laid out in §411. The vesting section has a paragraph which reads that a participant that terminates employment with 10 years continuous service will be 100% vested. All of the commentary, pension reference guides, etc. that I've run across state that those exclusions are permissive and in order to take advantage of them, they must be expressly stated in the plan document. If that's the case, then the former employee has 10 years of continuous service and should be 100% vested. Not to run on forever, but just wanted you to know the whole story. By the way, where in NC are you from? I'm in Kinston (eastern NC).

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[david rigby]

Well,

it is/was fairly common for plans to use your Pre-ERISA definition of service (that is, to refer to the prior plan). However, it is/was also fairly common for plans to require that to get pre-1976 service that the EE must be employed on 1/1/76.

So, the summary you relate seems to be silent on this last point. I would suggest a very careful review of the language in the 1976 plan restatement, focusing on such definitions as "Employee", "Service", "Participant", etc. Then if there is still ambiguity about the plan's intent, see if there is any precedent related to this point.

That is, the participant in question may not be vested at all because the Plan ignored the 1957 to 1974 service, thus treating the 1976 rehire as if it were an original hire date. Your task is to review the history, in the form of plan document and prior examples.

[chris]

I'm in the process of reviewing the doc's carefully including the terms/definitions you pointed out. How can the plan be operated in such a way that the 1957 through 1974 service is ignored if the plan doc doesn't actually state that such service will be ignored?

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[david rigby]

Good question.

The answer may lie in the definitions of service in both plans (76 and pre-76). If the pre-76 plan states that the EE must be employed on 1/1/76 to get any pre-76 service, then it probably does not matter what definitions apply in the pre-76 plan. However, if the 76 plan is silent on that point and defines pre-76 service as determined in the pre-76 document (as you state), then look in the pre-76 document for any provision which would/might state whether any service after a break would count.

That is probably too wordy. But let me offer an example:

We have a number of plans which define pre-76 service as "completed years and months since the employee's most recent date of hire", or similar. We interpret "most recent" (and our clients meant it this way) such that service prior to a severance of employment (prior to 1976) is lost, no matter when the rehire date occurs.

[chris]

Pre-76 Plan

The pre-76 plan defines service as "continuous employment with the Company. Leave of absence shall not constitute an interruption of such service." The pre-76 plan contains the following as Article VIII Termination of Employment and Termination of Membership : "In the event of termination of a member's service before his retirement date and after attainment of age 55 and 10 years of service with the Hospital, the member shall receive at his retirement date an annuity based on his service to the date of termination of employment."

76 Plan

Defines "Continuous Service" as "an Employee's period of broken(the doc actually says this) service with the Employer with no breaks in service which would terminate employment." "Continuous Service shall be deemed to be broken, for purposes of the Plan, by absence due to: (a) voluntary quit; (B) discharge or termination of employment; © failure to return to the service of the Employer after expiration of an authorized leave of absence or final release from Active Duty." The plan then has a provision re breaks in service to the effect that Continuous Service will be reinstated if participant was vested prior to the break or if the time period between the break and the re-hire date is less than pre break service.

Keys "Credited Service" to completed years and months of Continuous Service subsequent to date of hire or age 25, if later. Caps Credited Service at 35 years. Provides a formula for Credited Service. States that Credited service prior to jan 1, 1976 shall be determined under this plan in effect prior to jan 1, 1976.

Defines eligibility for employees not employed on Dec 31, 1975 as age 25 and 1 year of Continuous Service with the initial eligibility computation period as beginning on the date of hire (or re-hire).

Section 8 Vesting Upon Termination of Employment provides that "There shall be no benefit payable from the Plan if a participant's employment is terminated prior to qualifying for any benefits under the Plan and prior to completion of the requirements for vesting." Also, "No participant's accrued benefit derived from employer contributions shall be nonforfeitable until the completion of ten years of Continuous Service, at which time such participant's accrued benefit derived from employer contributions shall be fully (100%) vested."

Other than that the 76 Plan does not expressly say what, if any, service is disregarded for vesting purposes. Maybe the intent was that Continuous Service means what it says. Even so, wouldn't the doc have to expressly state what service is and is not counted? Pursuant to Reg. 1.411(a)-5(B)(5), wouldn't pre-1971 service be automatically counted since employee had 3 years of service after Dec 31, 1970 regardless of what the plan doc said?

I apologize for the length/depth of this post. Thanks for your help thus far.

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[This message has been edited by chris (edited 03-16-2000).]

[david rigby]

From what you have related in your immediately prior message, I would say that no pre-76 svc counts for anything. It is the word "continuous" that stands out most to me, particularly in the following:

"Defines eligibility for employees not employed on Dec 31, 1975 as age 25 and 1 year of Continuous Service with the initial eligibility computation period as beginning on the date of hire (or re-hire)."

Your last comment about pre-71 service is interesting. Look carefully at that reg, especially the first sentence of 1.411(a)-5(B), and then subsection "(6)Service before effective date". My read of that subsection is that the service prior to 1/1/76 need not be counted if the prior plan would not count it. Therefore, my focus would be on whether the prior plan as of 12/31/75 would have counted the pre-76 service. It looks to me like it would not, since he was not actively employed at 12/31/75, unless he was vested under the vesting provisions in effect at 12/31/75.

[chris]

Thanks for the reply. What is the purpose of 1.411(a)-5(B)(5) if 1.411(a)-5(B)(6) allows such service to be disregarded anyway?

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[david rigby]

I think the difference is whether the EE is employed on 1/1/76.

I would love to hear from others, to see if my explanation is too oversimplified.

[Guest Brian4]

This is in response to my posting under the Defined Benefit Plans Message Board. I agree with Pax's comments. Unfortunately, pre-ERISA breaks in service are usually not required to be repaired.

For an example of the application of the section you mentioned, consider a hypothetical case. Say prior to ERISA, the plan only counted years of service after age 25 for vesting. That provision could cause the plan to recognize pre-age 25 years prior to ERISA's effective date.