Initial eligibility in 401(k) plan

[MoShawn]

I have checked everywhere I can think of, and cannot find a definitive answer.

Entry requirements are age 18 and 1 year of service. Year of service is the 12 month computation period from hire date to anniversary (switching to plan year afterward) in which and employee has 1,000 hours of service. Entry dates are monthly.

Date of birth = 5/7/86

Date of hire = 6/13/05

Date of term = 12/10/07 (actual last pay was 4/15/07)

Date of rehire = 7/16/08

2005 hours = 466

2006 hours = 675

2007 hours = 207

2008 hours = 960

2009 hours = 1,032

EE did not have 1,000 hours between 6/13/05 and 6/12/06.

When does this person become eligible for the plan?

a) software says 7/1/09 (1,000 between 1/1/09 & 6/30/09),

b) client says 8/1/09 (based on 7/16/08 rehire date)

c) gut says 1/1/10 (ee never had a year of service in a prior computation period)

[Guest Laurel]

Well, I vote for 2010 on the grounds that 2009 was the first computation period in which the employee has over 1000 hours of service. A computation period as you described it requires BOTH a 12-month period AND 1000 hours.

[pmacduff]

The person never met the eligibility requirements nor did they enter the plan on their first go around. It's like the original time did not exist.

I say they start over and if that's the case would examine the first 12 months from "rehire date" (July 2008 - July 2009) and it appears they had over 1000 in that period.

I side with the client and the 08/01/2009 entry date on this one.

[Guest Laurel]

The person never met the eligibility requirements nor did they enter the plan on their first go around. It's like the original time did not exist.

I say they start over and if that's the case would examine the first 12 months from "rehire date" (July 2008 - July 2009) and it appears they had over 1000 in that period.

I side with the client and the 08/01/2009 entry date on this one.

Hmmm.... pmacduff might be right. Does your Plan have any language about how breaks in service affect the eligibility computation periods? I have plans that provide "The initial computation period beginning after a 1-Year Break in Service shall be measured from the date on which an Employee again performs an Hour of Service." If that provision appears in your Plan, there is a break in service in 2007, the new computation period would begin with the rehire in 2008, the Year of Service would be complete in July 2009 and entry would occur in August.

[MoShawn]

From definitions section:

1-Year Break in Service - "means the applicable computation period during which and employee has not completed more than 500 hours of service with the employer." (language about recognizing leaves of absence) Years of Service and 1-Year Breaks in Service shall be measured on the same computation period.

Year of Service - For purposes of eligibility for participation, the initial computation period shall begin with the date on which the Employee first performs an Hour of Service. The participation computation period shall shift to the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service. If there is a shift to the Plan Year, then an Employee who is credited with the required Hours of Service in both the initial computation period (or the computation period beginning after a 1-Year Break in Service) and the Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service, shall be credited with two (2) Years of Service for purposes of eligibility to participate.

From Eligibility section:

Reemployed before five (5) consecutive 1-Year Breaks in Service. If any Employee becomes a Former Employee due to severance from employment with the Employer and is reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service occur, then the Former Employee's prior service shall count in the same manner as if severance from employment with the Employer had not occurred.

[pmacduff]

Laurel - my two censts

I thought break-in-service rules would apply once someone becomes a participant. Why would you examine breaks-in-service for someone who never met original eligibility? In the OP's example the employee never satisfied eligibility and entered the Plan.

The break-in-service rules would be examined if you were talking about the rehire of a former "participant".

[MoShawn]

The break-in-service rules would be examined if you were talking about the rehire of a former "participant".

Note my post above on "Reemployment before five (5) consecutive 1-Year Breaks in Service". It does reference "Employee". There is another paragraph in the same section with nearly identical wording that references "Participant".

[pmacduff]

I stand by the 08/01/2009 plan entry date...the prior service is disregarded as though it never existed. From a Plan standpoint the Employee's hire date for all intents and purposes is 07/16/2008.

[RDY2RTR]

I think that based on the Reemployment before 5 BIS section the prior service is not disregarded because the employee did not have 5 consecutive break in service years. While the employee didn't work 1000 until 2009, counting the prior service means that the eligibility computation period in which the EE worked 1000 hours is the plan year, so, for the 1/1/2009-12/31/2009 ECP, the employee met the service requirement (1000 hrs in 12 month ECP) and would enter on the first of month CWONF which is 1/1/2010. Also, I don't think BIS applies just to particiants.

[Guest Sieve]

RDY is correct on all counts.

The rule of parity (if applicable) applies whether or not someone already has become a participant--e.g., if there were 2-yr eligibility for a PSP, you might ignore the first year of service earned prior to termination of employment, but you might not, depending on the application of the rule of parity. And, remember--the rule of parity is not required to apply, so you'll have to look at the plan document (or AA) to determine if it applies.

Here, of course, there are no y/s earned prior to termination of employment. But even the rule of parity (if it applies as per the plan document) would not permit ignoring prior service, including the fact that the switchover to plan year for eligibility purposes already had occurred.

You must look to see what your document says about someone who terminates employment never having been a partcipant and then is rehired. For example, Corbel's Basic Plan Document says:

"[3.5]©

Rehired Eligible Employee who had not satisfied eligibility.

If any Eligible Employee who had not satisfied the Plan's eligibility requirements is rehired after severance from employment, then such Eligible Employee shall become a Participant in the Plan in accordance with the eligibility requirements set forth in the Adoption Agreement and the Plan.

However, in applying any shift in an eligibility computation period, the Eligible Employee is not treated as a new hire unless prior service is disregarded in accordance with [the rule of parity]

." (Emphasis added.)

Therefore, if the above above language were used in the document, this rehire would continue on the plan year y/s determination because there were not 5 b/s (and therefore prior service is not be ignored). Participation would be 1/1/2010. Of course, as pointed out by others, Plan language is controlling. But, even if the rule of parity does not apply here, then all service would count anyway, and the plan year therefore would be the applicable eligibility computation period--and the result (1/1/2010 participation) would be the same.

[MoShawn]

Thank you all for your input.

I think I've seen on these boards before a confirmation that, barring plan language to the contrary, a year of service is credited at the end of the computation period? Thus the result my software is giving me (enter 7/1/09, since ee worked 1,000 hours in the computation period by that date) is incorrect?

[RDY2RTR]

What software do you use?

[pmacduff]

How is it that the rehire is held out of the Plan until 01/01/2010 - but if I came to work there new as of 07/16/2008 and satisfy the eligibility, then I'm in the plan earlier than the rehire?

That just seems like something the DOL would be all over (keeping the rehire out an additional 5 months). I'm just trying to understand the logic here....help!

[Guest Sieve]

First, it looks like I was dead wrong about the b/s rules. You must be a particiapnt, as pmacduff stated, in order for those rules to apply. It's clear form the language of IRC Section 410(a)(5)(D)(i)--but apparently not so clear to a bleary-eyed Friday warrior like me.

However, it is not necessarily true that a rehired employee will enter the plan later than a new hire with the same rehire/hire date. If, in fact, in the OP, the rehire had the requisite number of hours between 7/16/08 and 12/31/08, then, because the rehire would be using the plan year computation period, he/she would enter the plan on 1/1/2009, after the end of the computation period in which he/she completed 1,000 h/s. The rehire need only complete the proper number of hours during the computation period and be employed on the last day of that computation period--the new hire must do the same, but the new hire's computation period is the year ending on the anniversary of the date of hire, and therefore the new hire must wait a full year, at a minimum.

In the OP, this rehire had the advantage of a short computation year, but just did not work enough, and therefore fell behind (so to speak) the new hire.

[MoShawn]

What software do you use?

I use Relius. I have never had it treat a rehired employee in a manner I thought was correct, regardless of how I set up the plan specs.