"First Day/Last Day Requirement"

[Guest Willy]

A defined contribution plan can, of course, require that a participant be employed on the last day of the plan year in order to share in the employer's profit-sharing contribution. Can a plan also require that a participant be employed on the first day of the plan year? Requiring employment on both first day and the last day of the plan year would mean that a rehired participant would not be eligible to receive an allocation of the profit-sharing contribution.

Treas. Reg. section 1.410(a)-4(b) requires participation immediately upon re-employment. It seems like "participation" must mean being entitled to receive an allocation of a profit-sharing contribution. Is there any legitimate way to say that the reemployed participant resumes participation but is not eligible to receive an allocation of the profit-sharing contribution because he was not employed on the first day of the plan year?

Thanks much!

[Guest Sieve]

I don't know why you couldn't place the condition you mention on receipt of an allocation. It just would require testing under IRC Section 410(b) (just as any other allocation condition would).

[Bill Presson]

Just thinking out loud here:

1. A first day requirement still wouldn't eliminate a top heavy contribution requirement

2. We often use 1000 hours in conjunction with the last day requirement which gets you most of the way there

[ETA Consulting LLC]

I guess the main point is that you can do anything as long as it is pursuant to a 'definitely determinable' formula with respect to who receives it and how it will be allocated. When you do that, you would have to account for the service spanning rules and address whether someone who terminated and was rehired within 12 months was considered employed on the first day. These are the types of administrative complexities I have sought to avoid over my career, if for no other reason than the failures to account for a unanticipated always seem to burn you in the end. Just a thought.

Good Luck!

[Guest Willy]

Thanks for your thoughts, folks. I appreciate it!

No top-heavy concerns here. I agree that using the more conventional 1,000 hours of service requirement makes sense. The context of my question is more looking back than looking forward. We are trying to decide whether this is something that needs to be added to a VCP submission.