Change in hours required for vesting

[401(k)athryn]

I have  a client that would like to change the hours required for a "year of service" for both eligibility and vesting from 1,000 hours to 750 hours.

For eligibility - I believe that, as of the effective date of this change, we will need to allow all employees to enter the plan if they have worked at least 750 hours in a year, even if it was a long time ago.

For vesting, do we need to adjust vesting based upon prior years of service during which an employee worked 750 hours (even if they were not in plan and/or did not work 1,000 hours)? 

I would think not.  I would prefer that the reduction in hours for a year of vesting service is applied on a prospective basis.

Thank you!

[ETA Consulting LLC]

Actually, I think the effective date of the amendment would be the effective date of a year of service being defined under the reduced hours.  So, if you amend a plan today to change the definition of a year of service for eligibility from 1000 hours to 750 hours; I believe a year of service for last year would still require 1000 hours.  In other words, the credit for the year service for working only 750 hours would begin on the effective date of the amendment.  The only individuals possibly effected for this change in eligibility would be someone who has never worked 1000 hours during the year.  Even if they worked 751 hours in a prior year, I don't believe they would earn a year of service for eligibility until they work 750 hours after the effective date of the amendment.  

I think the same logic applies to vesting.  I would love to hear what others think, but this seems pretty reasonable to me.  The effective date of an amendment does carry some value when you're actually changing a definition.

Good Luck!

[Tom Poje]

I think if it applied to the past, then arguably someone like 'Freddie' who worked for 3 years, never 1000 hours but over 750 each year and quit last year would have to be retroactively entered in the plan a few years ago and provided benefits for those years.

[ESOP Guy]

I think wording of the amendment carefully helps a lot in this question. 

The vesting changes are more common.  It helps a lot to right the amendment to say things like, "A Year of Service for vesting will be 750 hours worked in a 12 month period after 1/1/2019" for example. 

Same with the service write into the amendment when the new standard applied clearly. 

Off the top of my head I don't see any rehire issues but think of them.  Had a client recently amend the plan to say anyone hired after X date was on a 2/20% vesting instead of the old cliff vesting.  Had I been asked I would have told them to make it clear how you handle someone hired and terminated during the old time period and rehired after the new period. 

Constantly amazed people don't take a little more time and ask these kinds of question and spell them out.  You don't get extra points for using the least number of words in an amendment. 

[401(k)athryn]

Thank you all!

[Sellarsian]

Agree with the above, but there's another wrinkle that COULD be relevant.

If I recall correctly 750 is the maximum hours requirement for a year of service where only regularly scheduled hours are counted, just as 1000 is the maximum hours requirement for a year of service if all hours, including overtime, are counted. So IF the shift from 1000 to 750 is part of a switch from counting all hours to only counting "regular" hours, you might also have to consider the timing of the amendment adoption with respect to an employee who works less than 750 regular hours that year but somehow manages to accumulate 1000 actual hours worked ...

[ETA Consulting LLC]

Wow.  I've been doing this for 23 years and have never heard of a measurement of hours being based on how it was scheduled. I would love to see a cite on this one.  I've never seen any document language on it.

Good Luck!

[Tom Poje]

I  think a large number of union plans usually have a 750 hours requirement, not sure what the measurement period is, so maybe that is what is being thought of.

[Sellarsian]

ETA Consulting LLC,

These rules go back to regulations issued in the late 1970s in response to the passage of ERISA in 1974. They are still in force. A cite is CFR 2530.200b-3 - Determination of service to be credited to employees. Here's a relevant excerpt:

(d)Equivalencies based on working time -

(2)Regular time hours. A plan may determine service to be credited to an employee on the basis of regular time hours, as defined in paragraph (d)(3)(ii) of this section, if 750 regular time hours are treated as equivalent to 1,000 hours of service and 375 regular time hours are treated as equivalent to 500 hours of service.