More than 1,000 Hours for Allocation Condition

[Guest Statler]

Good Morning

I have an employer that would like to add an allocaiton condition to his profit sharing contribution of 1,500 hours of service. I beleive he cannot exceed 1,000 hours but I am having trouble proving this to him.

In the LRMs I can show where a non-Standardized prototype document is limited to 1,000 hours but he is looking at customizing a volume submitter.

I think it is a 401(a)(4) issue and I have also looked in ERISA 204 and regulations for ERISA 200 and have not found anything conclusive.

Any help would be greatly appreciated.

Thanks

[Belgarath]

Well, in the first place, I'm betting that the IRS won't issue a favorable determination letter for a plan requiring more than 1,000 hours for allocation to a non-terminated participant.

Beyond that, I'm not sure about the "prove it to me" statutory/regulatory back-up for that position. You might take a look at the DOL regs - I've emphasized a portion below which may be of some help. It specifically allows the "last day" provision, but says nothing about allowing more than 1,000 hours as a requirement otherwise. Maybe someone else can provide you with a better or more appropriate citation.

§2530.200b-1 Computation periods.

(a) General. Under sections 202, 203 and 204 of the Act and sections 410 and 411 of the Code, an employee's statutory entitlements with regard to participation, vesting and benefit accrual are generally determined by reference to years of service and years of participation completed by the employee and one-year breaks in service incurred by the employee. The units used for determining an employee's credit towards statutory participation, vesting and benefit accrual entitlements are in turn defined in terms of the number of hours of service credited to the employee during a specified period—in general, a twelve-consecutive-month period—referred to herein as a “computation period”. A plan must designate eligibility computation periods pursuant to §2530.202-2 and vesting computation periods pursuant to §2530.203-2, and, under certain circumstances, a defined benefit plan must designate accrual computation periods pursuant to §2530.204-2. An employee who is credited with 1000 hours of service during an eligibility computation period must generally be credited with a year of service for purposes of section 202 of the Act and section 410 of the Code (relating to minimum participation standards). An employee who is credited with 1000 hours of service during a vesting computation period must generally be credited with a year of service for purposes of section 203 of the Act and 411(a) of the Code (relating to minimum vesting standards). An employee who completes 1000 hours of service during an accrual computation period must, under certain circumstances, be credited with at least a partial year of participation for purposes of section 204 of the Act and section 411(b) of the Code (relating to benefit accrual requirements). With respect to benefit accrual, however, the plan may not be required to credit an employee with a full year of participation and, therefore, full accrual for such year of participation unless the employee is credited with the number of hours of service or other permissible units of credit prescribed under the plan for crediting of a full year of participation (see §2530.204-2 © and (d)). It should be noted that under some of the equivalencies which a plan may use under §2530.200b-3 to determine the number of units of service to be credited to an employee in a computation period, an employee must be credited with a year of service of partial year of participation if the employee is credited with a number of units of service which is less than 1000 in a computation period. See also §2530.200b-9, relating to elapsed time.

(b) Rules generally applicable to computation periods. In general, employment at the beginning or the end of an applicable computation period or on any particular date during the computation period is not determinative of whether the employee is credited with a year of service or a partial year of participation, or incurs a break in service, for the computation period. Rather, these determinations generally must be made solely with reference to the number of hours (or other units of service) which are credited to the employee during the applicable computation period. For example, an employee who is credited with 1000 hours of service during any portion of a vesting computation period must be credited with a year of service for that computation period regardless of whether the employee is employed by the employer on the first or the last day of the computation period. It should be noted, however, that in certain circumstances, a plan may provide that certain consequences follow from an employee's failure to be employed on a particular date. For example, under section 202(a)(4) of the Act and section 410(a)(4) of the Code, a plan may provide that an individual otherwise entitled to commence participation in the plan on a specified date does not commence participation on that date if he or she was separated from the service before that date. Similary, under section 204(b)(1) of the Act and section 411(b)(1) of the Code, a plan which is not a defined benefit plan is not subject to section 204 (b)(1) and (b)(3) of the Act and section 411 (b)(1) and (b)(3) of the Code. Such a plan, therefore, may provide that an individual who has been a participant in the plan, but who has separated from service before the date on which the employer's contributions to the plan or forfeitures are allocated among participant's accounts or before the last day of the vesting computation period, does not share in the allocation of such contributions or forfeitures even though the individual is credited with 1000 or more hours of service for the applicable vesting computation period. Under certain circumstances, however, such a plan provision may result in discrimination prohibited under section 401(a)(4) of the Code. See Revenue Ruling 76-250, I.R.B. 1976-27.

[GMK]

Does 411(a)(5)(A) help:

(A) General rule

For purposes of this subsection, except as provided in subparagraph ©, the term “year of service” means a calendar year, plan year, or other 12-consecutive month period designated by the plan (and not prohibited under regulations prescribed by the Secretary of Labor) during which the participant has completed 1,000 hours of service.

[subparagraph © concerns seasonal employees]

[Bird]

As Belgerath said, it's unlikely to get an allocation provision with more than 1000 hours approved - this is in the LRMs:

"(Note to reviewer: A nonstandardized plan may require, as an option on the adoption agreement, up to 1,000 hours of service.)"

I also agree that there may not be statutory/regulatory backup for that position, but I wouldn't waste time fighting it, when you can just put everyone in their own group and do whatever the heck you want, subject to testing.

[rcline46]

However, you cannot use the grouping technique as a subterfuge for an impermissable eligibility requirement.