Rehire - Refresher Course

[PainPA]

employee left employment on 4/27/2004 - was 80% vested and left the money in the plan

employee was rehired on 10/03/2009

he worked 501+ hrs in 2004

Is employee starting all over with a 1 year wait enter on the quarter?

[Tom Poje]

hopefully the document will tell you.

though it shouldn't happen, if its a 401(k) plan and operated under the rules of a 1 year rule, here is what would happen.

ee rehired 10-03-09. 1 year later is 10-03-10. person completes the required service, so is restored prior service, therefore retroactively enters back to 10-3-09. oh wait, that means they should have been included on the 09 ADP test. oh wait, you can't defer on money you earned previously. ugh. ugh and ugly.

therefore, as a general rule, you can not have a 401(k) plan that operates under the 1 year hold out rule.

but you indidn't indicate if this was a 4019k) plan, so it is hard to say. again, the document should say.

most likely the person enters immediately, if under the rule of parity, since they are vested, but again, the document should say - either under the eligibility section, or definition section (break in seervice, rule of parity, year of service, or something) hopefully you even have a restated document - my experience has been the descriptions in these are a lot better than they were in the past.

[PainPA]

it is a 401k and the document is a customized lawyer document and not your normal easy to read.

i guess my question deals more with understanding the 5 years breaks in service. If this applies does he start like a new employee?

2004 - 501+ hrs

2005 - 0 hrs

2006 - 0 hrs

2007 - 0 hrs

2008 - 0 hrs

2009 - if he does not work 501 hrs this will be the 5th year

I never really had to did into this ever before so my understanding could be totallly off. My understanding if he does not work 500+ hrs in 2009 he loses all prior service so he will have to wait 1yr to enter then the match going forward will start a new vesting schedule.

???????

[austin3515]

At the risk of repeating what Tom said, you need to look at the document. Our prototype (for example) says that whenever someone is rehire before incurring 5 breaks (which is your case), they're eligible right away...

[PainPA]

I am probably not typing all the info on my mind but that is what my document says as well...

but is the 2009 service break not an issue becuase he was rehired before the 5th year (2009) or is that yet to be determined by how many hours he works in 2009.

[GMK]

Your plan may read differently, but what I'm used to is that if a person has five or more consecutive one-year breaks in service (2005-2009 in your example), then service after the break is disregarded in determining vesting of the PRE-break benefit. So, in your example, the pre-break benefit remains vested at 80%, and incidentally, the other 20% might be forfeited after the five one-year breaks (check your plan to see when forfeiture occurs). Generally, all years of service (before and after the break) count for determining vesting for POST-break benefits.

But check what your plan document says about these things.

[GMK]

but is the 2009 service break not an issue becuase he was rehired before the 5th year (2009) or is that yet to be determined by how many hours he works in 2009.

OK, I missed this good point. With less than 501 hours in 2009, 2009 is a one-year break in service year. However, how this impacts vesting and forfeitures depends on what your plan document says about vesting and forfeitures. For example, does the document require that the person be separated from service and have five one-year breaks, or just five one-year breaks?

I suggest checking with the lawyer who wrote the document.

[PainPA]

it states as this in the SPD.... "..... you subsequently return to employment after you have incurred five consecutive one year breaks in service, you will lose credit for all years of service prior to the breaks in service. A break in service is a plan year during which you complete fewer than 501 hours of service unless you have an authorized leave of abscence."

1.) If I am reading it as if today was 10/3/2009... at that point he has incurred only 4 breaks and he is allowed in the plan, the first of the month following... (of which I was only recently notified that he was rehired)

2.) If I am reading it on December 31st and the plan sponsor diligently sends in the census and he only worked 499 hours in 2009... then he has to wait 1 yr and enter the 1st of the month following...

3.) If I am reading it on December 31st and the plan sponsor diligently sends in the census and he worked 502 hours in 2009... then he should have went into the plan on November 1st...

Thanks for your thoughts... I just picked up this plan and continued to use the exisiting EGTRRA restated document in which the lawyer was the also the TPA.

[K2retire]

Eligibility is based on the the date of rehire, not the date you learn about the rehire. It sounds like on the actual date of rehire, the participant had not yet incurred 5 breaks in service.

[GMK]

I agree with K2retire. Based on the SPD, the participant does not lose credit for the pre-break years of service.

[anspai]

What if they had incurred 5 consecutive one-year breaks in service then would the participant lose vesting or vesting and eligibility?

In other words does a participant that incurs 5 consec one year breaks have to start over on eligibility, if rehired or are they immediately eligible to participate but simply have to start the vesting process over (only on contributions made after rehire)?

For example, an employee works 5 years and is 80% vested under a 6 year graded vesting schedule. They then incur 5 one year breaks and the are hired back in the 6th year. I know that they are 80% vested in their prior balance but forfeit the 20% but are they eligible to participate immediately upon rehire (assuming plan has 1 year, 1,000 hour elig condition) or do they have to meet the elig conditions again?

[BG5150]

What if they had incurred 5 consecutive one-year breaks in service then would the participant lose vesting or vesting and eligibility?

In other words does a participant that incurs 5 consec one year breaks have to start over on eligibility, if rehired or are they immediately eligible to participate but simply have to start the vesting process over (only on contributions made after rehire)?

For example, an employee works 5 years and is 80% vested under a 6 year graded vesting schedule. They then incur 5 one year breaks and the are hired back in the 6th year. I know that they are 80% vested in their prior balance but forfeit the 20% but are they eligible to participate immediately upon rehire (assuming plan has 1 year, 1,000 hour elig condition) or do they have to meet the elig conditions again?

I would say that the "old" money was "stuck" at 80% vested, it would cease to accrue the last 20%. The "New" money, would be immediately 80% vested, and when the participant gets 1000 hrs in a plan year, he/she is 100% vested then. The participant would start again at zero.

As for re-satisfying the eligibility, what does the document say?

[Tom Poje]

basically, if the document uses the rule of parity, my notes say

Plan disregards prior service for eligiibility if the following occurs

Employee was an actual participant when break in service occurred (e.g. has met eligibility and entry date requirements)

Employee has at least 5 consecutive breaks in service

Employee is 0% vested in the accrued benefit / account balance in the plan

deferrals are taken into account in determining if a participant is vested or not. Since deferrals are 100 vested at all times, it is almost impossible for service to ever be ignored in a 401k plan under the 5 year break in service rules.

............

if the plan uses a one year break in service rule, then you can exclude them until they complete a year of service, but then the entry date becomes retroactive to date of rehire, which in a 401k plan botches everything since you can't defer after the fact. I believe the IRS expressed an opinion you can't use this option if you are talking about the deferral portion of the plan.

[Jim Chad]

HI Tom

You mentioned that deferrals are taken into account for vested account balance.

Can anyone give me a cite?

Also, would you count voluntary aftertax?

 

 

[Tom Poje]

ERISA Outline Book has the following

Chapter 4 Section V Part C

 

2.c.Cannot apply rule of parity once any degree of vesting is earned. Note that once a participant earns any degree of vesting (e.g., 20% vested under the plan's vesting schedule), there is no break in service rule that will permanently disregard his prior service for vesting purposes. If the participant incurs a break in service, the only rule that may apply to the prior service is the "one year break" rule discussed in 1. above, under which it is possible to get the prior service re-credited.

 

2.c.1)Elective deferrals included under rule of parity for post-2005 plan years. Treas. Reg. §1.401(k)-1(c)(1), as amended on December 29, 2004, provides that elective deferrals are disregarded only for purposes of IRC §411(a)(2). IRC §411(a)(2) addresses only the application of vesting schedules. Thus, these regulations require that elective deferrals be taken into account in determining whether the employee is 0% vested for purposes of the rule of parity. The regulations are effective for plan years beginning on or after January 1, 2006, although the regulations may be applied, at the employer's election, for earlier plan years ending after December 29, 2004. See Treas. Reg. §1.401(k)-1(g) (December 29, 2004).

 

2.c.1)a)Prior regulations had disregarded elective deferrals for this purpose. All of the vesting standards under IRC §411(a), including the rule of parity, were applied separately with respect to employer contributions other than elective deferrals, according to the earlier version of Treas. Reg. §1.401(k)-1(c)(1) that was published on August 8, 1991. Under that regulation, elective deferrals were disregarded for purposes of applying IRC §411(a) to other contributions or benefits. In other words, to apply the rule of parity to the employer-provided benefits (such as matching contributions or nonelective contributions) the 401(k) plan could treat the employee as 0% vested, even though he was 100% vested on the portion of his account balance derived from the elective deferrals, assuming he was otherwise 0% vested under the applicable vesting schedule. Contributions that were treated like elective deferrals, such as qualified nonelective contributions (QNECs), could be disregarded for this purpose.

The IRS, at a Q&A session on October 25, 2004, in Washington, DC, as the ASPPA Annual Conference, acknowledged that the 1991 regulations should be interpreted this way. However, this rule was modified in final 401(k) regulations issued on December 29, 2004, as discussed in 2.c.1) above.

 

[Jim Chad]

Thank you, Tom.

 

Happy New Year Tom and  Everyone!

[Jim Chad]

Just thought of something.  I think the old "Voluntary aftertax" is not considered Elective Deferral.  Taxes are not deferred and it is not Roth.

Does this mean we would not consider vested account balance in accounts for "voluntary aftertax"?