Eligibility upon Reemployment for Special Eligibility

[Guest Pension Fun]

I was hoping someone could provide their thoughts on an issue that has been controversial in our office.

Scenario involves 401(k) Plan that has eligibility of 1 month of service (83 hours worked in such month), and entry on first day of month following satisfaction of eligibility requirements. Participant was hired October 20, 2005, satisfied the eligibility requirements in November, and became a participant December 1, 2005. Participant subsequently terminated service on February 5, 2006. Participant worked 300 hours in 2006 and 220 hours in 2007 (total of 520 hours in anniversary period). Participant never deferred and never received any other employer contributions. Participant was rehired March 2, 2011. Therefore, participant did not incur five 1-year breaks in service and the Plan does not apply the one year holdout rule. Plan was subsequently amended in 2008 to require 3 months of service (83 hours worked each month).

Question is when does the employee become a participant. I think IRC 401(a)(5) provides that you must take into account all prior years of service in computing period of service under 401(a)(1). It does not say to take into account all prior service. Nor can I find anywhere that requires the Plan to take prior service into account, except for prior years of service. Further, the language in the Plan does not cover this particular scenario. Therefore, I think because the participant never earned a year of service, his prior service is disregarded and he must start new.

Others in the office state that once he became a participant, he is always treated as a participant so he should get into the Plan on his rehire date. But they can't provide anything in the Code or Regs that require it.

So, is there some guidance that provides a clear answer? Is there something special about becoming a participant that it is protected once it is a attained, even after a separation from service of more than 1 year (but less than 5 years)?

[ETA Consulting LLC]

1) There is no 411(d)(6) protection on plan eligibility. So, once eligible, always eligible is no correct. A plan may be amended to increase eligibility (but not beyond statutory maximums). Many plans, however, grandfather participants who have already met prior eligibility (making the new eligibility requirements apply to only those who have not yet became participants in the plan. So, be mindful of the difference between what is driven by the plan and what is required by law.

2) If the rehired employee had previously worked and satisifed the 3 month requirement, then they should enter the plan upon rehire. Remember, when you satisfy the service requirements, you don't have to be employed on the plan entry date. If you terminate, and are hired beyond that date, then you enter the plan then. This is your "can't prove a negative" case. In order to use another approach, you'd need to show an authority under your plans terms to eliminate or discount the service worked. So, even if it was not a year of service provided, but only a few months, where is it written in the plan that you get to discount that service? If it's not there, then you should include it.

Good Luck!