Minimum participation requirements; how to treat rehired employees who

[Guest JMLSON]

I am having trouble identifying how to treat rehired employees in the following circumstance. I have read through the 410(a) regs, but the answer is not clear to me. The document ONLY talks about the rehire of a PARTICIPANT, not a former employee:

Employee worked for the employer 6 years, then terminated for 8 years. Recently the employer adopted a 401(k) plan.

Since the employee was never a participant, because the plan was not in existence, his previous service is not disregarded under the break in service rules. Do they recognize prior service and let the employee enter the plan immediately? Or is he treated as a new employee?

[david rigby]

Unless the plan specifically mentions service prior to the plan's effective date, then it is probably ignored. Most plans also state that service prior to effective date is used only if the EE is employed on the effective date (or possibly the day before).

[Guest]

plus, if you will, the ees break in svc (8) exceed the years he worked (6). Even if plan had been in existence, I believe you ignore the prior years.

[M R Bernardin]

I'm not sure I agree with the prior posts. The statute does not permit you to disregard service prior to the effective date of the plan, except for vesting purposes, and only then if the document specifically disregards that service. The statute does permit you to disregard certain service of a former participant (e.g., service earned before a one-year break can be disregarded until the employee completes another year of service, and service of a nonvested participant earned before a series of one-year breaks can be disregarded if the number of one-year breaks equals or exceeds the greater of five or the number of years earned before the break). I think to use these rules, though, your plan document should specifically describe them. However, as you point out, the statute does not address what service can be disregarded in the case of an employee who was never a participant. I think the conservative approach is to count the prior service and let the employee in immediately, unless you have language in your plan document that allows the prior service to be ignored.

[Wessex]

I agree with M R Bernardin's analysis.

[david rigby]

I don't understand the comment above:

"The statute does not permit you to disregard service prior to the effective date of the plan, except for vesting purposes, ..."

Please explain.

[This message has been edited by pax (edited 03-23-2000).]

[Guest]

see 410(a)5

(A) General rule...except as noted in the exceptions B, C, and D all years of service must be taken into account

...(D) Nonvested Participants (i) yrs of svc with the ER maintaining the plan before any period of consecutive 1-yr breaks need not be counted if the consecutive 1 yr breaks = or exceeds the greater of 5 or the number of years before such period.

410(a)(iii)

by definition 'nonvested' means does not have any nonforfeitable right...

note:410(a)(4) deals with 'Time of Participation' e.g. 1st day of plan year or 6 months after meeting eligibility

I would hold that the break in service holds for eligibility as well as vesting.

The ERISA Outline Book says the Rule of Parity for determining when participation begins is used but only if employee was 0% vested in his employer-provided benefits when his break in svc started.

thus, I would argue

at time ee quit he was 0% vested -there was no plan

he break in svc > 5 and > than yrs previously worked.

therefore, ignore all prior years

I could be wrong, I agree that the regs aren't 100% clear, because you are talking 'participant' as opposed to 'employee' since there was no plan in existence.

on the other hand, if there was a plan in existence at the time he quit, and assuming he had taken his distribution thus being 0% vested in any remaining $, you would leave him out of the plan.

oh well, forgive my ramblings...

[Guest JMLSON]

This is the problem I am running into. Everyone has a different opinion (very different). The rule of parity states that the employee MUST BE A PARTICIPANT for this rule to come into play. The regs also state that ALL YEARS OF SERVICE must be used to determine elgigibility UNLESS DISREGARDED UNDER THE BREAK IN SERVICE RULES. These rules don't apply because the employee was never a PARTICIPANT. Maybe there is no answer???? This is why I love Pensions!!

[Guest ptpnthr]

First, what exactly does your plan say? You stated that the document only talks about rehired participants. Rehired participants who do not have a break in service should re-enter the plan on the date of rehire, and so it appears your plan is consistent with that rule. Rehired employees who satisfy the plan's eligibility provisions and who do not have a break in service should enter on next entry date. Your question is what service. My question is what does the plan say which service is counted? If it counts pre-plan service with the employer without regard to breaks in service, then you should follow the plan document and count it. If it doesn't count pre plan service, then don't count it. I don't agree that you MUST count pre-plan service. See, e.g., Rev. Rul. 69-409; also see DOL Reg. Section 2530.200b-2b-1(a) which only requires that a person credited with 1,000 hours DURING AN ELIGIBILITY COMPUTATION PERIOD be credited with a year of service for purposes of Code Section 410 and ERISA Section 202. There are no eligibility computation periods prior to establishment of plan. Of course, it doesn't make sense to adopt a plan and make everyone wait one year. I also don't think there is a lot of guidance on this issue and one could read the statute to require ALL service be counted for eligibility, including pre-plan service. You should consult legal counsel on this one.

[This message has been edited by ptpnthr (edited 03-31-2000).]

[KJohnson]

At the 1999 ASPA Conference the IRS was asked the following Question No. 96:

96. The rule of parity (Code Sections 410(a)(5)(D) and 411(a)(5)(D)) permits service to be disregarded for certain "nonvested participants." Can this rule be used if someone had terminated employment before the employer had even established a plan?

For example, an individual works for an employer for 3 years and then terminates employment. The employer does not have a retirement plan. The individual is rehired after 10 consecutive one-year breaks in service. The employer then establishes a retirement plan. Is the employee required to be credited with the prior 3 years of service or can the rule of parity be used to disregard the prior service?

A. The rule of parity applies to non-vested "participants". An employee who terminated prior to the plan effective date was never a participant and, thus, that prior service need not be counted.

However I still agree with JMLSON's problem, 410(a)(5) says that all years of service with the employer must be counted with the exceptions in paragraphs (B)©and (D)[with (D) being the rule of parity.] If this is not applicable because the employee was never a participant, it would seem that you are back to the general rule that all years of service must be counted.