Vesting

[Chippy]

I work at a TPA firm and one of the recordkeepers that we use is having their clients amend their plans to use elasped time vesting, employment anniversary to anniversary. .   Current adoption agreement says vesting is based on 1,000 hours in a plan year.   The problem with the 1,000 hours in a plan year they say, is that if a participant works 2,080 hours in a plan year, they will receive 2  years of vesting for that plan year, so this plan has a 3 year cliff schedule, the recordkeeper is saying a participant will 100% vest in 1 1/2 years.   Is this something new that I missed?        

[K2retire]

The record keeper is wrong. You can work every hour of the year, but you never earn more than 1 Year of Service in a 12 month period. Their programming may have problems with it, but that is something they should be able to fix.

[Kevin C]

You didn't miss anything.  They don't understand how hours based service works.

 

Counting hours does vest faster than elapsed time, but not not like that.  With a calendar year plan, someone at 40 hours per week hired on 7/1/2015 will end up with 3 years of vesting service by 7/1/2017.  At 2080 per year, that's 1040 hours from 7/1/2015-12/31/2015, 2080 for 1/1/2016-12/31/2016 and 1040 from 1/1/2017-6/30/2017, So, it's possible to get 3 years of service in a 24 month period.   

[Kevin C]

Elapsed time isn't without its problems, too.  Part-timers who wouldn't vest if you count hours do vest and repeated rehires can have additional service counted under the service spanning rules.

[RatherBeGolfing]

The recordkeeper is not just wrong, they are so wrong it is cause for concern...  

4 minutes ago, Kevin C said:

Counting hours does vest faster than elapsed time, but not not like that.  With a calendar year plan, someone at 40 hours per week hired on 7/1/2015 will end up with 3 years of vesting service by 7/1/2017.  At 2080 per year, that's 1040 hours from 7/1/2015-12/31/2015, 2080 for 1/1/2016-12/31/2016 and 1040 from 1/1/2017-6/30/2017, So, it's possible to get 3 years of service in a 24 month per

I agree with what you are illustrating, but I would say that the last year of service is not really earned until the end of the limitation year (12/31/2017) so it would be 30 months for the 3 years.. Unless the participant terminated right at the 24 month mark of course... 

[Chippy]

thank you all,  It's a very large recordkeeper too and I do have concerns that they would credit a participants with 2 years of vesting in one plan year.    I advised the client not to amend the plan, but they want to work  with the recordkeeper.    

[RatherBeGolfing]

5 minutes ago, Chippy said:

thank you all,  It's a very large recordkeeper too and I do have concerns that they would credit a participants with 2 years of vesting in one plan year.    I advised the client not to amend the plan, but they want to work  with the recordkeeper.    

Honestly, you probably just need to find a better person to talk to at the RK... This sounds like it is coming from someone who just does not understand plans

[K2retire]

I know that one of the largest record keepers requires the use of elapsed time on all of their bundled plans. If this is the same one, you may not be able to get them to budge.

[ESOP Guy]

Another quirk of elapsed time is a person can miss getting another YOS by a matter of days which seems unfair-- i know life isn't fair and all. 

But I have seen examples of a person who literally left their job less then 1 week from going from 0% vested to 100% vested in a cliff vesting schedule and elapsed time.  You can say they should have waited to leave but the average person doesn't think that way. 

[Kevin C]

3 hours ago, RatherBeGolfing said:

I agree with what you are illustrating, but I would say that the last year of service is not really earned until the end of the limitation year (12/31/2017) so it would be 30 months for the 3 years.. Unless the participant terminated right at the 24 month mark of course... 

That kind of provision is pretty common for determining years of service for participation. I've never seen it used for vesting service.   

[My 2 cents]

[If the plan uses an hours of service rule for vesting] The plan would specify the computation period for vesting purposes (most commonly plan year) and the hours of service required (say 1,000).  If, on the date the participant separates from service, the hours completed in that plan year are enough to satisfy the definition of a year of vesting service, it is not possible that the participant could be denied that plan year as a year of vesting service earned.  So if a person was hired in June 2014 and terminated in August 2016 and worked full time, and the plan defines a year of vesting service as a plan year (calendar year) in which the person completes 1,000 hours of service, it is inescapable that that person would have 3 years of vesting service on the date of termination notwithstanding having worked, on an elapsed time basis, barely more than two year.

[If the plan uses elapsed time for vesting]  One makes it to the end of the third year of employment (measured from date of employment to date of termination with each day counting for something like 1/365 of a year) or one does not wind up with three years of vesting service.  Of course, if the person works at a school that is open from September to May, the period from the end of the school year in May to the start of school in September would certainly count as vesting service even if the person is considered "terminated" during that period, so long as they recommence being an employee in September (or, actually at any time within a year of the date of termination).

[Mike Preston]

This discussion has implications in another current thread.  That other thread essentially asks the question: what is the participant's last day of employment?  IMO, organizations that don't have robust HR capabilities are better served by using the 1,000 hour rule.

As far as RBG's comment regarding cause for concern, I would say that is the very nicest way of wording it. If left to my own devices I would say that whoever suggested 2,080 hours would result in the crediting of two years of vesting service is dangerously incompetent and any organization that doesn't remove that person from client responsibilities is complicit.

[My 2 cents]

Looking back at the posting where concern was expressed, I would have expected that there would be a very strong inverse correlation between the size of the recordkeeper and the likelihood that they would credit a year of vesting service for each full 1,000 hours of service during a plan year (i.e., 1,000 to 1,999 hours = 1 year of credit, 2,000 hours or more = two years of credit).  I would never expect a "very large recordkeeper" to so totally misunderstand how the service crediting rules work!

To make sure that all are in agreement here, there is no such thing as an "employed on the last day of a plan year" rule with respect to vesting service.  Even for 401(k) plans.  One can only take termination before the end of the plan year into account for benefit accrual purposes and/or entitlement to annual additions (and even then, I don't think you can invoke such a rule in the context of a defined benefit plan).

[Lou S.]

7 hours ago, Chippy said:

thank you all,  It's a very large recordkeeper too and I do have concerns that they would credit a participants with 2 years of vesting in one plan year.    I advised the client not to amend the plan, but they want to work  with the recordkeeper.    

It is certainly possible to work less than 12 months and earn 2 years of vesting service under a 1000 rule but they would have to span 2 plan years.

Consider the case where a plan use the 1000 hour rule in a vesting computation period = PY = CY and employee is full time hired 7/03/15 and terminates 6/28/16. It is entirely possible (even probable) that they are credited with 1000 in 2015 and 1000 in 2016 but were only employed for 360 days and would have 0 years of service under elapsed time.

Of course some one earlier covered the quirks of elapsed time vesting so I won't rehash.

[Lou S.]

But you shouldn't get 2 years in one just for working twice the number of hours.

[My 2 cents]

41 minutes ago, Lou S. said:

But you shouldn't get 2 years in one just for working twice the number of hours.

Not to fear - nobody is calculating service under the 1,000 hour rule that way!

[K2retire]

19 hours ago, My 2 cents said:

Looking back at the posting where concern was expressed, I would have expected that there would be a very strong inverse correlation between the size of the recordkeeper and the likelihood that they would credit a year of vesting service for each full 1,000 hours of service during a plan year (i.e., 1,000 to 1,999 hours = 1 year of credit, 2,000 hours or more = two years of credit).  I would never expect a "very large recordkeeper" to so totally misunderstand how the service crediting rules work!

In my experience call center employees, even at very large record keepers, are typically the least experienced and least knowledgeable employees. I am not surprised that someone would get an incorrect initial answer. The trick is to move up the ladder to someone who actually knows what they're talking about.

[Tom Poje]

I wonder if they are getting confused between vesting and eligibility. This does show up from time to time in a plan requiring 2 years of service for eligibility. You calculate 1 year based on date of hire to date of hire and then switch to plan year. so someone hired 10/1/2015 who worked 1000 hours form 10/1/2015 - 9/30/2016 and 1000 hours in 2016 would receive credit for 2 years of service and enter 1/1/2017 even though they only worked 14 months.

[BG5150]

I would be wary of any record keeper that said I had to amend my document because of system limitations. 

Unless the provision was quite out of the ordinary.