Interns

[Guest JMN]

Are paid interns considered common-law employees and, if so, can they be categorically excluded from participating in a plan (subject to the minimum coverage and nondiscrimination rules)?

[Mike Preston]

Yes and yes, providing it is not a disguised 410(a) violation. See the regs for an example whereby part timers are excluded by class and the result is a 410(a) violation.

[Guest JMN]

Yes and yes, providing it is not a disguised 410(a) violation. See the regs for an example whereby part timers are excluded by class and the result is a 410(a) violation.

Good. My concerns were that it could be viewed as an indirect service requirement that could result in violating 410(a). I didn't see anything specifically addressing "interns" which are unlike part-time or seasonal employees, because they could work full-time for say 6 months and complete a 1,000 hour-based YOS, but then they're gone. They could return the following year for full-time employment but shouldn't receive credit for periods of internship.

[Mike Preston]

Huh? Did you mean to say "shouldn't"? If so, why not? Isn't the case you have defined precisely what the example is meant to preclude?

[Guest JMN]

Huh? Did you mean to say "shouldn't"? If so, why not? Isn't the case you have defined precisely what the example is meant to preclude?

I did, though I recognize that this is an issue. We want to exclude paid interns because if they are hired the next year (for example, if a college student is in a full-time paid internship with the plan sponsor and completes more than 1000 hours, they could enter the plan earlier than the sponsor would like them to. So if a paid intern is considered a common law employee, excluding them would probably look very much like an indirect service condition that could result in a 410(a) violation.

Are you aware of any guidance that an UNPAID intern is not a common law employee?

[Mike Preston]

Probably? Seems like precisely to me.

I'm not familiar with rules regarding interns. UNPAID interns sounds like a violation of some law or another.

[masteff]

http://www.dol.gov/whd/regs/compliance/whdfs71.htm

http://www.dol.gov/WHD/opinion/FLSA/2002/2...9_05_8_FLSA.htm

http://community2.business.gov/t5/Business...ships/ba-p/9340

Mike - they're perfectly legal, but only if they pass the FLSA test discussed in the above links. Too many unpaid internships fail the test and are in fact illegal.

Here's a short article on using unpaid interns: http://www.inc.com/news/articles/2010/04/w...d-cost-you.html

[Guest JMN]

Am assuming that we pass as valid "interns" - which I don't view as having a common law employment relationship.

As for paid interns, they are common law employees and excluding them as a category presents a real potential for being an indirect service condition that oculd violate 410(a). If we define them as having terms limited to x months and non-recurring, perhaps we might avoid having this problem.

[Guest Sieve]

I'm not undetrstanding. If everyone who is hired first serves as an intern for, say, 2 years, & then moves on to different jobs, & if interns are excldued from the plan, then that's a disguised service requirement in excess of 1 yr. But, if interns are a distinct classification of employees, some of whom are fulltime & some of whom, perhaps, are parttime, then I see excluding them as simply a 410(b) coverage issue.

[masteff]

The part of this I didn't comment on last night but would like to circle back to is...

they could enter the plan earlier than the sponsor would like them to.

It's tough luck what the sponsor would "like" if it contradicts laws created specifically to prevent employers from denying rightful benefits to employees. Sometimes advocating the best interest of the company means compliance comes before management's desires.

But you can report you've diligently researched the question if you decide in fact that you must count internship service toward eligibility and vesting.

Edit: just to clarify, I think we've created two issues. 1) excluding during the internship itself and 2) excluding internship service if the intern is later hired into a regular position.

[pmacduff]

we have a large plan that excludes interns by class, however if an intern is later hired on permanently; they are given credits for prior service [where applicable] for elig and vesting per the Plan provisions.

(some satisfy elig. requirements of 1 YOS over 1000 hours, age 21 while an intern).

This plan easily passes coverage (there are not that many interns anyway).

FWIW - this has never been questioned upon audit.

[Mike Preston]

I'm not undetrstanding. If everyone who is hired first serves as an intern for, say, 2 years, & then moves on to different jobs, & if interns are excldued from the plan, then that's a disguised service requirement in excess of 1 yr. But, if interns are a distinct classification of employees, some of whom are fulltime & some of whom, perhaps, are parttime, then I see excluding them as simply a 410(b) coverage issue.

Thanks for the links, masteff. Very informative.

As to the above, I agree with the slippery slope being what kind of crossover is allowed before it becomes a disguised service requirement in excess of 1 yr. Let's say the firm historically provides for 4 internships and typically hires 1 of those 4 as permanent employees. Certainly that would be a potential problem. But let's say that in most years, the 4 internships run their course and those interns do not become regular employees of the company. After 4 years or so of this program, in the fifth year, the company hires one of the interns. I would think this would not be a problem.

At issue is where one draws the line. I'd suggest conservatively.

[Guest Sieve]

But, excluding interns from participation does not permit you to ignore that prior service as an intern when they are later hired permanently. They are separate issues. You cannot ignore any prior service, regardless of reason, for purposes of participation, other than in break-in-service situations, so whether or not an itnern was eligible to participate will have no bearing on the fact that an employee's intern years will count as service when hired into an eligible job classification.

[Mike Preston]

I don't disagree. Did my post imply that I do? Sorry.

Maybe I should have made it clear that the interns in question may involve repeat interns, such that if they weren't "interns" they would have, at some point, entered the plan. That is the concern, where somebody, classified as an intern, earns enough hours of service to become a participant, and is held out due to being in the excluded class.

I think we both agree that if the pattern for an employer is to provide internships such that individuals (such as college freshmen) go through four years of said internships and that virtually every one of the interns becomes a regular employee when the internship ends that you have a pretty obvious 410(a) violation.

[Guest Sieve]

I don't agree, Mike. First of all, of course, if age 21 is part of the equation then the college interns are eliminated for a few years right there. Next, if the employer doesn't require all employees to be interns before being hired permanently, then why would excluding a returning intern be any different from excluding an employee rehired as a drill press operator if drill press operators are excluded from participation as a job classification?

Now, if interns were excluded, and all employees were required to spend 3 years as an intern before moving on, then there's a problem. Likewise if porbationary employees were excluded, and everyone ahd to spend 3 years as a probationary employee. So, I don't think the problem is that all interns eventually are hired, but the problem would be if all employees had to pass through internship in order to be hired permanently.

[Mike Preston]

Then we will have to disagree. I think the funnel you are describing does not need to be all inclusive at the front end (you describe a situation which is violative where all employees first must be interns or probationary). I think all that is required is that the funnel be all inclusive at the back end (I describe a situation where all, or most, interns become employees).

Read the example in the regs again. Clearly they are talking about part-time employees and there is no requirement that all employees first hired be hired as part-time employees.

At least that is how I see it.

[Guest Sieve]

Mike --

If you are talking about example 3 of Treas. Reg. Section 1.410(a)-3(e)(2), that's easily explainable. There, you are excluding an employee due to a job description which is based on their expected (normal, customary, regular, whatever) service--e.g., customarily working less than 20 hrs./wk--and, in that case, the classification based strictly on service is trumped if the individual works a y/s.

But, if the classification is not service-based, but, for example, is based on legitimate job description (e.g., duties, department, division), then it is ok under 410(a). On the other hand, if "intern" was a classification into which all part-timers fell, then it would be a service-based classification and would violate 410(a).

But, disagreement is ok--although I did not think there were too many who were more ERISA-conservative than me!!

[Mike Preston]

I agree, disagreement is OK!

I think we both understand the issues.

The ultimate question is whether the IRS or DOL could/would claim a disguised service requirement in excess of that which is statutorily/regulatorily allowed.

[Guest ENT]

What about employees who are hired to work in a business division that only operates from January to May? If they don't qualify for exclusion under the special project rule, they can still be excluded from the plan based on their job descriptions, but just subject to the coverage and nondiscrimination rules. It's possible that some of these employees complete 1000 hours of service, but I don't view this to be an indirect exclusion based on hours of service. Just because they happen to be seasonal positions doesn't mean the exclusion is based on that status.

Any thoughts?

[ETA Consulting LLC]

You have:

1) Employees who are all part of a division

2) The division operates seasonal

3) Some of the employees in the division meet the 1000 hours requirement.

When you exclude all employees of that division, it shouldn't be an issue. The argument is, however, that if you were to arbitrarily create a division for purposes of droping the part-time and seasonal employees in, then that would be a disguise. This is facts and circumstances. Just ensure you have good documentation of division (existing for business purposes as opposed to a mechanism to disguise improper exclusions) and you should be fine.

Good Luck!