When does benefit accrue under elapsed time?

[Guest PiggyBank]

When does a participant's benefit accrue under a DB plan utilizing an elapsed time crediting formula? If participants are credited with a year of service on the last day of the plan year, and participants' accrued benefits are calculated based on years of credited service, does that mean under the elapsed time formula that participants do not accrue their benefit until the last day of the plan year?

[Effen]

You need to look at the plan and see how it counts service. It can be years, months, days, etc. My experience with elapsed time plans is that it usually accrues over days. In other words, if they are employed on the 2nd day of the year, they have earned 2/365 of an accrual. If they are employed on the 60th day, they have 60/365. You need to be careful with elapsed time because it ignore periods of no service. In other words, if you work the first and last day of a year, you probably earned the entire year.

Not every plan is the same, but I'm pretty sure you can't require anyone to work all 365 days to get any accrual. I'm thinking you at least need to provide 50% accrual for 50% of the year, but I'm not positive.

[Guest PiggyBank]

Thank you, Effen, but isn't there some regulatory or statutory authority with respect to this issue? A plan could theoretically provide for all sorts of different accrual rules, but they won't necessarily be valid unless they comply with the IRC and its regulations. Is there any citation to an existing authority on when a benefit accrues under elapsed time?

[Effen]

Yes, there are definitely rules for elapsed time. Keep in mind the base method for crediting service under the law is counting hours. Any other method (i.e. elapsed time) is just an approximation that can't produce an answer worse than counting hours. Therefore, even under elapsed time you still need to guarantee that someone who completes at least 1000 hours still must receive at least a 50% accrual.

From CCH Summary: Benefit accrual under the elapsed-time method

The elapsed-time method allows a plan to determine an employee's service for the purpose of benefit accrual on the basis of a participant's total period of service beginning on the date a participant first commences participation under the plan and ending on the severance from service date ( .87 ).

A plan which uses the elapsed time method for the purposes of benefit accrual must meet the requirements established for plans which determine an employee's service for the purpose of benefit accrual on a basis other than computation periods. Specifically, the plan's provisions must meet one of the benefit accrual rules established by ERISA under all circumstances --that is, the 133% rule; the 3% rule, or the fractional rule (see ¶2565). Also, such a plan may not disregard service performed by an employee during a computation period in which the employee is credited with less than 1000 hours.

There is a lot written about crediting service. Search what ever service you are using or check out 1.410(a)-7 for more details.

[My 2 cents]

It was always my understanding that if the plan used the elapsed time rules (full credit, based on days, from the day of employment and/or participation to the day of severance, including credit for leaves of absence under a full year etc.) then it was not necessary to also track hours. If the plan uses elapsed time rules, then, irrespective of hours worked, it takes a full five year period from date of hire to date of separation to become fully vested under the 5-year cliff vesting schedule. The plan could presumably use hours for vesting and elapsed time for benefit accruals, but I don't think I have ever heard that hours must be used for that purpose, even if following the 1,000 hour rule would have resulted in vesting more quickly. If that is not how the plan is set up, then it is not necessary to ensure that the results are not less favorable than if one were tracking hours and using hours for vesting. I believe that the IRS regulations under Section 410(a) are consistent with this.