2000 hours for a match???

[Guest Tim Baker]

An Auditor friend of mine is working on a 401(k) Plan Audit. This is a non-standardized Plan with 1000 hour requirement for match contribution. The sponsors were told by the TPA/Account manager/Whatever that in order for a person to get a match, they must work 1000 hours to be a participant and 1000 more for the match. (A total of 2000 hours for the match contribution).

Is there a limit as to the maximum hours of service a Plan can impose to receive a match contribution? I have never seen more than 1000 hours and never questioned it. Please respond with a code section or site that says the limit. (also the TPA said they passed 410(B) with that 2000 hour requirement. (right))

Probably a stupid question. Thanks for your help.

[Guest]

there are no rules. (see The ERISA Outline Book) the closest you can come is 411(B)(4), year of participation,but that pertains to DB plans.

the book goes on to say

'The DOL recognized the absence of accrual requirements for defined contribution plans...'DOL reg 2530.200b-1(B)

how such a plan can pass coverage every year is beyond me- unless the HCEs are getting less than 2000 hours as well.

oh, maybe its a pension admin company. everybody already has 2000 hours by April 15. silly me.

[M R Bernardin]

Does the plan have a year of service requirement for eligibility to participate? Is it possible that what is meant is that employees have to work 1000 hours during their first year of employment to become eligible to participate, and another 1,000 hours in every plan year after they become a participant in order to share in the match?

[Guest Tim Baker]

They do have the year of service (1000 hours) but they maintain that they must be added together, not double count the 1000 hours for both participation and match. It sounds to me that they don't know what they are doing, but I thought I'd check and see if 2000 hour requirement was possible before I shoot them down. Thanks for all your replies. (Tom, try and write a better song for Quantech 6.0, 5.0 was just the theme from Hawaii 5-0)

Tim

[Wessex]

A couple of years ago, a client insisted that I draft his profit-sharing plan (in the form of a volume submitter document) with 2,000 hours required for an allocation, despite my advice that it would not be approved by the IRS. I was, of course, unable to provide black letter law prohibiting it. Needless to say, the IRS would not issue a favorable determination letter. This was a very small client who did not wish to go through an appeals process, so we did not push it very far.

The initial post indicates that the plan is in the form of a nonstandardized prototype. I doubt seriously that the terms of the prototype could reasonably be construed to require 2000 hours for a matching contribution and most likely would not have been contemplated as such by the IRS. Even if this plan has a favorable determination letter, unless there had been explicit disclosure in the application, there is probably no reliance for this issue.

If this is permissible, I am surprised that this is not a common option given the desire of some employers to exclude as many employees as possible from receiving benefits.

[Guest]

Tim:

you missed the Quantech Memphis Meeting.

'Elvis' was there to sing 'Return to Sender'

At the Orlando meeting I will demonstrate a Crystal version of the Qualification Analysis test that implements the 'shift' option of using deferrals.

hope to see you there.

[Kirk Maldonado]

I had a different experience. I got a favorable determination letter (with no objection from the IRS) many years ago on a plan that required 2,000 hours of service.

Of course, you always run the risk that the plan could be discriminatory in operation, but that shouldn't stop you from getting a determination letter.

[pjkoehler]

The Labor regulations provide that a plan may use different computation methods for different computation periods. If it uses the standard hours counting method for all periods, then the plan cannot require more than 1,000 Hours of Service during the eligibility computation period to credit the employee with a full year of participation for eligibility purposes or require more than 1,000 Hours of Service during the vesting computation period to credit the employee with a full year of participation for vesting purposes. On the other hand, such a plan could require more than 1,000 Hours of Service during an accrual computation period to credit the employee with a full benefit accrual unit (i.e. a full "year of participation" for benefit accrual computation purposes), so long as an employee who is credited with at least 1,000 Hours of Services is credited with a partial benefit accrual unit that is at least equal to a ratable portion of a full accrual unit. See 29 CFR Sec. 2530.200b-1 and 2530.204-2© and (d). So, for example, a 401(k) plan that provides for an allocation of the company matching contribution for employees credited with at least 2,000 Hours of Service, must also allocate to the accounts employees who are credited with 1,000 Hours of Service, 50% (1,000/2,000) of the allocation they would have otherwise received had they been credited with at least 2,000 Hours of Service.

Such service crediting rules are not uncommon among defined benefit plans covering hourly paid workers. They are rare among 401(k) plans, since the rules tend to interfere with the plan's ability to satsify the ACP test, besides probably having a negative employee relations impact. I'm not positive, but I suspect the LRMs don't permit such service crediting rules in standardized or nonstandardized 401(k) prototypes plans.