December 31 is a Sunday

[Below Ground]

Person terminated on last workday of 2017, which is Friday 12/29/2017.  For the profit sharing allocation the person must be there on the last day of the year (12/31).  Since that is not possible for this firm (closed on weekends), is the person deemed to have been there on the last day, and qualify for the allocation? 

Also, how does this last day is Sunday impact coverage (and other) testing?

[Bird]

I think most of us would consider him employed on the last day of the year.

I don't think there is any impact on testing.

[Belgarath]

I'll take the opposite approach - if we receive a census stating that the date of termination is 12/29, we would not consider them employed on the last day of the plan year.

[Calavera]

I would side with Belgarath on this one, and will go back to Plan Sponsor for clarification. If they would want to make a case, they can change the date of termination in their systems to 12/31.

[Belgarath]

Actually, we would do the same as Calavera - I just didn't take it that far in my initial response. We would go back and question if 12/29 is really the date they want - if so, then their initial certified termination date stands - if they want to change it to 12/31, we'd ask for written verification of the new termination date.

As per the terms of our service agreement, we are perfectly within our rights to rely on the certified census and not question it, but as a matter of service, we do.

[david rigby]

Caution.  This isn't the first time that 12/31 fell on a weekend.  Check for precedent.

[ESOP Guy]

It is the Plan Administrator's call.  I think the PA has the ability to interpret the plan as saying last day includes last work day if 12/31 falls on a day not normally worked.  We would not make the client change the census we would tweak our system to conform with the PA's wishes. 

We would document this whole thing as you just set precedent (as david notes) and make sure the client is consistent after that. 

As a general rule I find most client will call this the last day of the plan year. 

I had one client years ago whose union contract was very clear the plan had to treat the last Fri of the year as the last day if the 31st fell on a Sat or Sun. 

[Tom Poje]

the long winded answer from War and Peace...I mean the 2005 ASPPA Conference Q and A #32 was

32. What does it mean for an employee to be employed on the last day of a plan year, for example, in determining eligibility for a top heavy minimum contribution? EXAMPLE #

1: 7/31/2005 falls on a Sunday. If an employee's last day of work was on 7/29/2005 and the plan sponsor is closed on Saturday & Sunday, would the employee be considered to

be employed on the last day of the plan year ending 7/31/2005? EXAMPLE # 2: Employee terminates employment on 2/23/2005 and is paid two weeks unused vacation

pay on his last day of work. Would this employee be considered to be employed on the last day of the plan year ending 2/28/2005? EXAMPLE # 3: Following a hectic tax

season, a CPA firm closes from April 16th through May 5th. An employee works on 4/15 but does not return to work when the company re-opens in May. Would this employee be

considered to be employed on the last day of the plan year ending 4/30/2005?  EXAMPLE # 4: 12/31/2004 was New Years Eve and many businesses were closed that

day since January 1st was a Saturday. If an employee's last day of work was on 12/30/2004, would the employee be considered to be employed on the last day of the plan

year ending 12/31/2004? This also affects plans which require employment on the last day of the plan year as a condition for sharing in the allocation of the employer

contribution or forfeitures. I have never seen any guidance from the IRS or DOL addressing this issue even though the top heavy rules are twenty years old. Thanks!!!

A. Being "employed" on the last day of the year is NOT the same as WORKING ON the last day of the year. Employment is a "relationship" with the employer. If you are on

vacation and someone asks you where you work, if you are still "employed", you have an answer, even though you are not actually working during the vacation period.

So, if 12/31 is a Sunday and it is a business that is only open mon-fri, unless someone has been TERMINATED from employment as of that day, they are still employed even though

it is not a work day.  So, your example 1: as long as the person wasn't terminated, he is still employed on 7/31 even though it's a Sunday and not a work day.

Example 2: Employee is TERMINATED prior to the last day; he is not employed on the last day regardless of how much money he is being paid upon termination. He is NO

LONGER EMPLOYED by the firm as of 2/23.  Example 3: The question is always "is he employed" during that period, not "is he working". (BTW, seasonal employee rules were never issued, so let's not deal with "seasonal employees" here - besides, I don't think a three week shut down qualifies as "seasonal"). Let's just assume that everyone is on vacation. Are they FIRED (terminated) on 4/16? Unlikely. They are basically on a company wide vacation; they are still employees; they are supposed to come back on 5/5. Therefore, they are still employed as of 4/30.

Example 4: Basically the same as opening comment about 12/31. Here, the company is closed 12/31 and last day of work was 12/30. None of that matters; what matters is "was

he still employed on 12/31", and the answer is yes (UNLESS he was actually terminated on 12/30).

[Below Ground]

So, if I read Mr. Pojie correctly, the person who terminated on 12/29 is not employed on the last day since his employment relationship terminated prior to that date?  I don't think any of the examples fit this situation, since in example #1 the person was not terminated on 7/29.  Otherwise that example, and #4, would be identical.

I had already asked the Plan Sponsor to clarify if the person should be considered terminated on 12/31 vs. 12/29 given the arguments that were provided earlier.  I suspect I should discuss the issue of setting a precedent if the answer comes back as yes?

[BG5150]

I usually go with the question asked in example 1:  on 12/31 ask the person "where do you work"?

In the case of the OP, the answer on 12/31 is "not at that company, anyway."  Therefore no EOY employment.

[Below Ground]

I appreciate all comments.  Thanks to everyone.

 

[ESOP Guy]

26 minutes ago, Below Ground said:

So, if I read Mr. Pojie correctly, the person who terminated on 12/29 is not employed on the last day since his employment relationship terminated prior to that date?  I don't think any of the examples fit this situation, since in example #1 the person was not terminated on 7/29.  Otherwise that example, and #4, would be identical.

I had already asked the Plan Sponsor to clarify if the person should be considered terminated on 12/31 vs. 12/29 given the arguments that were provided earlier.  I suspect I should discuss the issue of setting a precedent if the answer comes back as yes?

I think you should read example 1 again. 

I quote the question:

EXAMPLE #

1: 7/31/2005 falls on a Sunday. If an employee's last day of work was on 7/29/2005 and

the plan sponsor is closed on Saturday & Sunday, would the employee be considered to

be employed on the last day of the plan year ending 7/31/2005? E

 

I quote the answer:

So, your example 1: as long as the person wasn't terminated, he is still employed on 7/31

even though it's a Sunday and not a work day.

 

Note the question says "an employee's last day of work" so he did not come back to work on 8/1.  So to me this is exactly the situation  you have. 

Maybe I am reading this wrong but to me terminated has to mean more then quit otherwise none of the questions matter.  If the IRS' answer mean as long as the person doesn't quit the Fri before that Sunday he is still employed they didn't answer the question as far as I am concerned. 

[Tom Poje]

I took the IRS comments to be somewhat of a facts and circumstances.

suppose a company was open on Sunday, but Fred, a strict Christian never worked on Sunday in 5 years.

If he quit on Saturday I think I would treat him as being there on the last day.

On the other hand, if the company wasn't open on the weekend, and Robby was found taking a late Christmas bonus from the cash register and was 'let go' on Friday, I would probably treat as not there on the last day, because if the company had opened on the weekend he wouldn't be there.

Thinking outside the box, instead of looking at the calendar year, I'd see no problem looking at the comp that falls within the plan year as a guide. certainly the document says use W-2 comp, and you don't use 1/1- 12/31 for that purpose. so, for example Christy quits 12/29/2017. If the plan was a safe harbor, would she get a small contribution in 2018? if you say YES, it is as if you are treating as having 'worked' in 2018. So now she is treated as 'working' in the plan year for 2018, but having failed the last day rule she wasn't working the last day in 2017. That at least seems somewhat strange. so the question might be better put, was she working on the last day of the comp period that ends within the plan year. But then I always have been somewhat a basket case.

 

[ERISAAPPLE]

The answer could depend on whether the termination was voluntary or involuntary.  If it was voluntary, an argument could be made the employee was not employed on the 31st.  If it was involuntary, that could raise an ERISA Section 510 issue, but those are always pretty easily rebutted.  Ultimately this is probably a mixed question of fact and plan interpretation that should be decided by the appropriate plan fiduciary in accordance with rules and/or principles that are consistently applied for all similarly-situated participants.     Among the factors to be considered could be whether the termination was voluntary or involuntary (as noted above), and how the employee/former employee was reported, paid, or treated with respect to other matters.  What was reported for unemployment purposes, was he or she paid for those two days, did he or she have access to the building or IT systems, was the employee on-call, when did the employee's insurance coverage end, etc.  Not all of these factors are necessarily relevant or determinative, and other factors or circumstances could be relevant.      

[Larry Starr]

I'm pretty sure I wrote that Q&A answer in 2005 (I was head of the Q&A process).  Those were our (my) interpretations and the IRS agreed with them.  That's not so say someone else at some other time at some other part of the IRS would have a different opinion, but I stand by those answers. So, a couple of things....

If  you are "interpreting" it and trying to use "precedent", I think you are in error.  Either an employment relationship is continuing on 12/31 or it is not.  If someone is terminated as of 12/30, they are not employed on the last day of the year; period.  We have this discussion with clients all the time and it is the client's call to determine what the termination date is.  I should point out there are other issues at play: worker's compensation; unemployment benefits, health & welfare benefits, etc.

This is NOT a facts and circumstances issue; it is a factual issue and the employer makes the determination.

I disagree with my good and old friend Tom on the issue of the strict Christian.  Whether he ever worked on Sunday or not, if Sunday is the last day of the year and he QUIT on Saturday, he is not employer on the last day of the year.  If he turns in his resignation and says he quits as of 12/31 and the employer doesn't countermand that, then he IS employed on the last day of the year.  This is ALWAYS an employer determination, and the question to ask is always: "is there still an employment relationship on 12/31 or has it ended prior to 12/31".  Simple question (but I acknowledge not always a simple answer because many clients don't think about it when someone quits on 12/30).  

On the other hand, my wife and I got MARRIED on 12/30 (many MANY years ago), so we know how important the difference is between the last day of the year and NOT the last day of the year! :-)

 

[Belgarath]

13 hours ago, Larry Starr said:

This is ALWAYS an employer determination, and the question to ask is always: "is there still an employment relationship on 12/31 or has it ended prior to 12/31". 

I agree with Larry. As I said, we often question it with the employer to have them confirm one way or the other, but it is their call, and we go with what they decide. Of course, in many situations it doesn't make any difference one way or the other, and then we wouldn't normally bother to check.

[Tom Poje]

I would still disagree with Larry on this one. it does boil down to a facts and circumstance.

I tell the company I'm starting a new job in 2018.

so they are making up the work schedule for the last week. oh, he never works on Sunday so don't schedule him that day. too bad but good for us, now we don't have to give him a contribution either. even if he was willing to work that day, we could still have not scheduled him and he is out of luck because he quit and didn't work the last day.

I'm willing to bet the DOL would be interested

[Peter Gulia]

Here’s another way to think about these questions.

 

When there’s a close question about choosing between permissible, and perhaps even plausible, interpretation of a plan’s provisions, the plan’s administrator might consider its fiduciary duty of loyalty.

 

ERISA § 404(a)(1)(A)(i):  “[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—for the exclusive purpose of: providing benefits to participants and their beneficiaries[.]”

 

Also, a fiduciary might consider that its implied duty of impartiality favors interpretations that one can explain as logically consistent for different participants whose circumstances that are relevant under the plan are the same.

 

A plan’s administrator might explain and illustrate its interpretations in the plan’s summary plan description.  A duty to do so might be heightened if an interpretation is one that deprives a participant of a contribution, or incremental vesting, in circumstances an “average” participant might perceive as having worked or been employed a whole year.

 

[Tom Poje]

I like that.

though I was hoping you would have said

let's go back to the glorious old days of vesting 100% after 10 years service and let the person go after 9 years since he is 0% vested.

[CJ Allen]

I've encountered this question several differing ways, and usually indicate "what are your normal working hours, and is it possible to work on weekends?" is not a typical question to ask when reviewing thousands of allocations across millions of participants. 

I usually leave it up to the sponsor's payroll department.  If there's a date entered, that date is used. 

IMHO, I favor using the last day an hour of service was performed.  If that date is not on or after the last day of the plan year, then no allocation if last day requirement.  This is permissible based on coverage and non-discrimination testing (as applicable) results.

I usually get a question about termination date on last day of plan year and if allocation is to be provided.  in that case, the person would be employed on the last day.  Some allocation packages do not see last day termination date as allocable, so that type of system may require an override or "day after" date to allocate to last day terminated participants.

[david rigby]

23 minutes ago, CJ Allen said:

I usually leave it up to the sponsor's payroll department.  If there's a date entered, that date is used. 

...which assumes the payroll department understands the issue. 

 

Quote

I favor using the last day an hour of service was performed.  If that date is not on or after the last day of the plan year, then no allocation if last day requirement. 

Unfortunately, this ignores how the person was paid.  Example, EE terminated on 12/29/17, and got paid on that day for a full month's compensation.

[CJ Allen]

If the trade or business operates on weekends, we can't assume the person earned a full month's compensation.  Scheduled to work is not the same as working.  Here, it would seem to require a bifurcation of salaried vs. hourly employees which could be discriminatory. 

So, in your example, I'd be concerned if you're indicating the person could terminate 12/28, but as long as they earned their full month salary, they would be eligible for an allocation.

 

[Tom Poje]

of course after you don't provide a contribution to one of the owners kids or an HCE who was liked they will get back to you and tell you the provided term date was bad, the person really quit on 12/31. nudge nudge. wink wink.

 

[CJ Allen]

been there, done that...

[CJ Allen]

David -- For "services," I'm taking the meaning from Treas Reg 1.410(b)-9 based on "Former Employee" definition citing "An individual is treated as a former employee beginning on the day after the day on which the individual ceases performing services as an employee for the employer."

[Below Ground]

Another complication would be accrued, unused vacation days.  Could the person say on 12/29 I am taking my week of paid vacation, that now put the person's termination date in the next year?  While I can see holes in that argument, I can also see the DOL agreeing with that position.  I suggest that issues like this do seem to support that the employer needs to define the correct date.

[Belgarath]

And this brings it squarely back to the determination, made by the employer, of whether the employment relationship has terminated, and if so, when. Let us suppose that the employee, on December 15th, says, "I quit, today." The fact that there is now 4 weeks of accrued vacation time that must be paid does not make this person an employee on December 31st. On the other hand, if the employee simply goes on vacation on December 29th, and then never returns, (like Charlie on the MTA, for you other old-timers) what is the termination date then? I'm no labor lawyer, so I don't make the determination - it is up to the employer to do that. I agree with everyone that facts and circumstances can be tricky, but it is still the responsibility of the employer to make that determination, and then to inform us of the correct termination date.

I promise not to say anything more on this subject!

[Larry Starr]

On 1/31/2018 at 9:30 AM, Fiduciary Guidance Counsel said:

Here’s another way to think about these questions.

 

When there’s a close question about choosing between permissible, and perhaps even plausible, interpretation of a plan’s provisions, the plan’s administrator might consider its fiduciary duty of loyalty.

 

ERISA § 404(a)(1)(A)(i):  “[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—for the exclusive purpose of: providing benefits to participants and their beneficiaries[.]”

 

Also, a fiduciary might consider that its implied duty of impartiality favors interpretations that one can explain as logically consistent for different participants whose circumstances that are relevant under the plan are the same.

 

A plan’s administrator might explain and illustrate its interpretations in the plan’s summary plan description.  A duty to do so might be heightened if an interpretation is one that deprives a participant of a contribution, or incremental vesting, in circumstances an “average” participant might perceive as having worked or been employed a whole year.

 

Peter,

I completely disagree.  The determination of date of termination is an employer determination. It is external to the plan and it is not a fiduciary act. The key is (as I said before and as CJ has quoted) whether the employment relationship has terminated.  Only the employer can answer that question, and if it ended on 12/30 because that was a Friday, then "tough nuggies"; the employee is NOT employed on the last day of the year.  This is not a difficult question; it either is or is not, and the employer just answers the question about whether the relationship ended before 12/31! 

[Peter Gulia]

Consider an example:

 

In 1998, the Secretary of Labor sued Time Warner.  The complaint asserted it was a breach of a fiduciary’s duties under ERISA § 404(a)(1) to rely, without the fiduciary’s independent evaluation, on the employer’s classifications of who is or was an employee (and which periods and hours of service an employee worked).  Herman v. Time Warner Inc., No. 98-7589 (S.D.N.Y. complaint filed Oct. 26, 1998).  In 1999, Judge Chin decided “the government has sufficiently alleged that the Administrative Committee and Time Warner breached their fiduciary duties under ERISA[.]”  And the court expressly rejected the defendants’ argument that the fiduciary-breach claim was merely a subterfuge for a claim for benefits.  Whatever one thinks about the facts alleged, the court could not have found that the complaint stated a claim without accepting the Labor department’s legal premise that a plan’s administrator is responsible to make its own findings and must not entirely rely on the employer’s findings, even on the question of whether a worker is or was an employee.  Herman v. Time Warner Inc., 56 F. Supp.2d 411, 23 Empl. Benefits Cas. (BNA) 2646 (S.D.N.Y. Sept. 3, 1999).  (We’ll never know what a court would have decided after considering evidence; in 2000, Time Warner settled this case for $5.5 million.)

 

[Mike Preston]

In our little corner of ERISA, the employer is also the plan administrator.

[Peter Gulia]

It's often so that a plan's administrator (and named fiduciary) is the same person as the plan's sponsor and the employer.  But those facts don't excuse the person from fiduciary responsibility if an act or decision is taken in a fiduciary role.

I suggest considering fiduciary responsibility IF there is a close question and a call for interpretation.

And considering fiduciary responsibility does not necessarily lead to an interpretation or application that would favor the no-longer-employed participant.  Sometimes, considering a fiduciary's several duties leads to other directions.

 

[jpod]

I completely agree that it's a fiduciary-plan administrator decision, not an employer-settlor decision.  The money has been contributed to the plan.  You then look to the plan document to determine how to allocate it to participants.  That is the pa's role as a fiduciary. 

[Mike Preston]

It is a bit more nuanced. I think the determination of employed status is definitely a settlor function.  But it isn't unchallengeable by the Plan Administrator if it is obvious that the employer is doing something wonky (defined in ERISA Section 999.9).  And, yes, that same person who is both ER and PA needs to put on the PA hat and blow the whistle if the ER is, in fact, doing something wonky.  Of course, that isn't likely to happen.  The structure of thinigs is such that the PA is exposed in a fiduciary sense for not taking action, while the employer is only exposed if the wonky action has employee/employer consequences outside of ERISA.

[jpod]

Yes, I agree with that more nuanced analysis. 

[BG5150]

Flip a coin:  Heads, they're in, tails out.

[Tom Poje]

in other words it is like catching a pass in football, (or whether a pass interference should be called).

some hold it is obvious. he either did or didn't

but under the current rules....

[david rigby]

38 minutes ago, Tom Poje said:

but under the current rules....

...which (sort of) screams that someone(!) should have a rule.

[Larry Starr]

22 hours ago, Fiduciary Guidance Counsel said:

It's often so that a plan's administrator (and named fiduciary) is the same person as the plan's sponsor and the employer.  But those facts don't excuse the person from fiduciary responsibility if an act or decision is taken in a fiduciary role.

I suggest considering fiduciary responsibility IF there is a close question and a call for interpretation.

And considering fiduciary responsibility does not necessarily lead to an interpretation or application that would favor the no-longer-employed participant.  Sometimes, considering a fiduciary's several duties leads to other directions.

 

Peter,

I still disagree; this is not a case of determining whether someone is an employee or not. The Time Warner case is not on point as it was an issue of independent contractor vs employee (as was the similar Microsoft case).  In our case, there is no issue of whether the individual WAS an employee (he was) and there is no question of what periods or hours of service he worked (he worked on 12/30 but did not work on 12/31). The question here is different: did the employment relationship terminated PRIOR to the last day of the year.  Only the employer can answer that.  The plan administrator cannot overrule that and if the employee doesn't agree, he goes to court to prove he wasn't terminated prior to 12/31.  For the plan administrator to allocate funds to someone the employer said was terminated prior to the end of the year would require the PA to violate the terms of the plan. That would be an ABUSE of his fiduciary responsibility and, in a PS plan allocation, all of the other employees would have a cause of action against him.  No PA in his right mind would/should ever take that action.

BTW, there is another case that Time Warner won that is also useful to refer to: Time Warner, Inc. Benefit Plans v. Biscardi, 2000 U.S. Dist. LEXIS 16707 (S.D.N.Y. 2000). 

[Peter Gulia]

I remember that later Time Warner case had different results.  But it didn't undo the legal point made in Judge Chin's opinion that the earlier complaint stated a claim on which the court could grant relief.

And if there can be circumstances in which a plan's administrator should not unquestioningly rely on an employer's or service recipient's finding about whether a worker is or was an employee, perhaps there sometimes can be circumstances in which one might not rely entirely on an employer's description about exactly when an employment ended, especially if (as sometimes might happen) that description has no legal significance beyond the plan-administration point.

Most often, a plan's administrator follows an employer's information about exactly when someone became no longer an employee.  Among other reasons, a plan's administrator might lack information that would call into question the employer's information.

Here's another thought:  Imagine what the worker's supervisor would have presumed if she had no information beyond what the employer knew on December 31.  If she expected the worker to be available to work on his next scheduled work day in early January, was the worker still an employee on December 31?  One also might ask a converse question: Had the worker, before January 1, decided he would not return to work?  (Or had the employer, before January 1, informed the worker that the employer no longer desired the worker's labor or service?)

Further, some of the questions and ambiguities described in this thread's two webpages might turn on the exact text of the plan's governing document. 

 

[Larry Starr]

On 2/8/2018 at 10:25 AM, Fiduciary Guidance Counsel said:

Here's another thought:  Imagine what the worker's supervisor would have presumed if she had no information beyond what the employer knew on December 31.  If she expected the worker to be available to work on his next scheduled work day in early January, was the worker still an employee on December 31?  One also might ask a converse question: Had the worker, before January 1, decided he would not return to work?  (Or had the employer, before January 1, informed the worker that the employer no longer desired the worker's labor or service?)

Further, some of the questions and ambiguities described in this thread's two webpages might turn on the exact text of the plan's governing document. 

 

Peter, In the first example you raise, it matters NOT what the supervisor knows.  If the employer (the supervisor's boss) terminated the employee on 12/30, he was terminated on 12/30. In your second example, if the employee was supposed to show up on 1/2 and did not, then the employer's rules might very well say the employee was terminated as of his last day worked, which again, in this case was 12/30.