Crediting Hours of Service

[401 Chaos]

Can a plan sponsor craft their own rules for counting Hours of Service under a 401(k) Plan? In this case, the plan sponsor is a university and has historically permitted instructors (similar to adjunct professors) to participate in the 401(k) subject to the plan's 500 Hours of Service requirement. Instructors are paid based on the number of classes (and class hours) they teach per semester. The university has historically tracked instructors' Hours of Service for 401(k) Plan purposes by crediting them with 2 Hours of Service for each 1 "hour" (really 50 minutes) spent in class. Thus, each hour taught by an instructor results in 3.0 Hours of Service (1.0 hour for the in-class time plus 2.0 hours of prep time). Based on a quick read of the regulations, it does not seem to me that a plan sponsor can craft it's own system for crediting service or establishing Hours of Service equivalencies. Am hoping I am missing another way to think about that. Thanks.

[Mike Preston]

The fact that this is a governmental plan makes it less familiar territory than if it were subject to all of ERISA.

But this seems to me to be a variation on the old 410(a) issue dealing with part time workers. If you look at the 410(a) regulations I think you will find that the IRS takes the position that a "strange" definition for eligibility will be considered non-compliant, even if the resulting group of participants satisfies 410(b), if the "strange" definition keeps people out of the plan who would otherwise have qualified for the plan had the plan used a "normal" definition of eligibility.

So, the question back at you is: is it possible that anybody would be excluded now who would not be excluded if the plan used a statutory definition for eligibility? If not, and the only thing going on here is that a less restrictive definition is in place, I wouldn't worry about it.

Now, there are some who believe that the specific regulation mentioned is no longer looked at by IRS personnel as applicable; or that it was contrary to so many other provisions in the code that it isn't enforceable, anyway. Dangerous territory, that, but understandable.

If, when you get done, you have it reviewed by outside counsel, nobody should blame you.

[401 Chaos]

Mike,

Thanks for the response. FWIW, I don't think this is a governmental plan as it is a private university. As to whether this provision keeps people out that wouldn't otherwise be included, I would not think so but that is difficult to answer under the current regime because the instructors do not track their actual hours worked. The 2 hours out of class for each hour spent in class is apparently an old academic rule of thumb. I suppose it is possible though that an instructor who teaches several classes may actually not work the required hours if he just "wings it" on the prep (or has a lot of teaching experience in that area, etc. and so doesn't have to prepare much) while an instructor that only teaches one class but hyper-prepares, is new, etc. could go over the required hours if actual hours were tracked but fall well short under the deemed hour approach. Thanks.

[K2retire]

When I've worked as a adjunct instructor, that rule of thumb has been pretty close to accurate -- even when I taught pension plan law. By the time you prepare an outline of a lecture, dream up assignments and test questions and grade all of the above there are many more hours than just those in the classroom.

Even ASPPA allows more CE hours for teaching a class than attending one.

[401 Chaos]

Thanks, I don't doubt that rule of thumb is pretty good--if anything I would worry that it is too low--but I guess my concern in looking at the DOL Regs on hour of service equivalencies is that a plan sponsor has to follow one of the set formulas there if it doesn't actually count hours and that what the university is doing does not follow those. If they actually counted hours, I bet things would work pretty close. However, if you use one of the DOL formulas and have to count an instructor that only teaches one class but works continuously throughout the year, wouldn't you end up with more credit under the DOL formula than under the university's formula.

[TLGeer]

The hours of service regulations are, strictly speaking, part of the ERISA/Code minimum standards for service requirements on eligibility. This means that any method for determining service eligibility that captures all who have met the minimum standards meets the minimum standards. (E.g., requiring only 500 HOS for a YOS.) A prophylactic clause based on a permitted equivalency (e.g., elapsed time) solves this problem. The real problems arise later in the analysis.

The fundamental issue is discrimination. If the instructor group consists disproportionately of HCEs, this could raise discrimination issues. Potential risks include basic coverage discrimination and benefits, rights and features discrimination. Since these issues are more complex, could you provide detail on HCE status? Otherwise, the issues have to be discussed twice, once for high HCE rates and once for high NHCE rates.

Tom Geer

[401 Chaos]

Tom,

Many thanks. I don't have the exact numbers but the instructor group is heavily NHCEs.

[Belgarath]

Probably a foolish question on my part, but what does the current plan document say, if anything? Does it outline this method of counting hours? And if so, does it have a determination/opinion/advisory letter?

[401 Chaos]

The current plan document does not address this in any way. This was done in-house as an administrative / interpretative matter to try and apply the standard hours of service formula to the instructor group. The big problem with that group is that nobody really has an idea how many actual hours they work.

Not precisely on point but the following is from the 2003 JCEB Q&As with the IRS:

28. §411(a) – Vesting Service Crediting Method

A profit-sharing plan covers only the salaried employees of a plan sponsor. A year of vesting service under the plan is credited for each plan year in which an employee is credited with at least 1,000 hours of service. Since all participants are salaried employees, actual hours of service are not tracked by the plan sponsor. Rather, the plan sponsor credits 40 hours of service for each week a salaried employee is employed. Is this a permissible method of crediting service?

Proposed response: No. If actual hours are not measured, one must credit hours based on an equivalency permitted under the regulations. However, under Labor Reg. §2530.200b-3, 40 hours per week is not a permitted equivalency. Rather, under subsection (e) of the regulations, the plan sponsor would be required to credit 45 hours of service for each week for which an employee would be required to be credited with at least one hour of service.

IRS response: The IRS agrees with the proposed answer. A sponsor cannot do “do-it-yourself” equivalencies. The DOL equivalency rules are the only permitted exception to counting hours for plans.

[TLGeer]

So, no discrimination issues.

[401 Chaos]

No, no discrimination in the usual HCE vs. NHCES sense anyway.

I suppose though that it could be discriminatory (or maybe inequitable is the better word) to an instructor who works more than 500 (untracked) hours but doesn't get there under the deemed hour rules.

What do you think about Belgarath's notion about this being spelled out in the plan going forward. Seems it needs to be in there. If so, wouldn't the Service's reasoning in the JCEB excerpt present problems in getting that approved (i.e., just because there may be no actual discrimination doesn't mean it complies with all the rules or that the Service may permit)?

[TLGeer]

No, no discrimination in the usual HCE vs. NHCES sense anyway.

I suppose though that it could be discriminatory (or maybe inequitable is the better word) to an instructor who works more than 500 (untracked) hours but doesn't get there under the deemed hour rules.

What do you think about Belgarath's notion about this being spelled out in the plan going forward. Seems it needs to be in there. If so, wouldn't the Service's reasoning in the JCEB excerpt present problems in getting that approved (i.e., just because there may be no actual discrimination doesn't mean it complies with all the rules or that the Service may permit)?

Yes, I agree the rules should be in the plan document. You would still be in a posture where people could be improperly excluded under the minimum standards, so you would still need a fallback rule. Given the need for a fallback rule based on actual HOS or an equivalency, explain to IRS that the general rule meets minimum standards and that the 3X rule is nondiscriminatory. Individual employees could, of course, show higher HOS than the 3X norm with appropriate proof and become eligible.

Tom Geer