Previously Frozen Plan Restated into Active 401k: Rehired Employee Eligible?

[cheersmate]

When is the following rehired employee eligible?

John was hired in 2019 and worked very part time generally speaking, never working 1000 hours... until he did.

The Plan at that time was a Profit Sharing Plan and it was frozen.

John's service history is:

2019 370 hours

2020 111 hours

2021 393 hours

2022 1000 hours (age > 21)

2023 516 hours and Terminated 7/2023.  Because the Plan is frozen John does not enter the Plan, is not a "Participant" even though he completed 1000 hours and min age 21. No account balance, 0% vested.

2024 -0- hours [1st One-Year Break-in-service]

2025 Rehired Dec 2025, 71 hours

TO NOTE: The frozen PSPlan was Amended and Restated effective 1/2024 into a Safe Harbor 401k PSPlan, eligibility is 12 mos / 1000 hours, min age 21. [LTPT eligibility is based on the standard provisions.]

The A&R Plan document provides the new eligibility provisions apply if an Employee is not yet a "Participant" as of the effective date of the change. Further it defines "Participant" as an Employee having satisfied eligibility AND entered the Plan.

[X] This amendment or restatement (or a prior amendment or restatement) modified the eligibility and/or entry date requirements and the prior eligibility and/or entry date conditions continue to apply to the Eligible Employees specified below. If this option is NOT selected, then all Eligible Employees must satisfy the eligibility and entry date conditions set forth above.
        1.   [X]    The modified eligibility and entry date conditions above only apply to Eligible Employees who were not Participants as of the effective date of the modification.

 

QUESTION: is John eligible and his Entry Date is as of Rehire in December 2025 or must he wait until he completes 1 year/1000 hours (or LTPT elig reqs) and enter per Plan Entry Dates?

Thank you.

[Marjorie Lucas]

Since John has not yet completed the minimum requirements of 1000 hrs as specified in the plan document based on his rehired date, he will become eligible to participate in the plan as soon as he completes the mandatory 1000 hrs.  His previous employment will not be taken into consideration in any future calculation, should he remain employed for the foreseeable future.

[cheersmate]

Just to confirm my understanding, his previous employment is ignored, including the one (1) Plan Year with 1000 hours (2022), for eligibility, vesting and contributions because the Plan was frozen at that time, and, he terminated* prior to the Restatement in 2024 (*at termination he was not a Participant because Plan was frozen and had zero vested interest)? 

[rocknrolls2]

IMHO, not enough facts are known to provide a definitive answer. First look at the plan document. Does it credit service using the counting hours method or usimg the elapsed time method? It would also help to know what the employee's date of hire is. If the hours counting method is used, do eligibility computation periods after the first year switch to to the plan yesr or do they remain 12-month periods that start on the anniversary of the date of hire? One other factor is whether eligibility determinations continue in spite of the suspension of benefit accruals. For this, you need to obtain the plan amendment imposing the suspension. Once this information has been assembled, it will be easier to determine whether and when the employee in your example became eligible.

[Marjorie Lucas]

TO NOTE: The frozen PSPlan was Amended and Restated effective 1/2024 into a Safe Harbor 401k PSPlan, eligibility is 12 mos / 1000 hours, min age 21. [LTPT eligibility is based on the standard provisions.] In the original message, enough information is provided to draw conclusions as to the administrative decision.

For Profit Sharing Plans as posted on the IRS website:

April 1, 2021

A profit-sharing plan has the same contribution limits as a Simplified Employee Pension (SEP) Plan; however, it gives you more flexibility than a SEP. A profit-sharing plan may:

• Exclude employees that work less than 1,000 hours, while a SEP excludes employees who work less than 3 of 5 years or have less than $650 in pay.
• Allow for loans to participants, while a SEP may not make loans.
• Require vesting that rewards longer-term employees, while a SEP is always 100% vested.
• Limit distributions, while SEP participants have no restrictions on taking withdrawals.

Profit-sharing plans have a Form 5500 series filing requirement and must meet other administrative requirements compared to a SEP.

Adopt a written plan document

Plans begin with a written document that serves as the foundation for day-to-day plan operations. There are two basic types of plan documents.

• Individually designed plans are provided by a retirement plan professional and may be designed to meet your specific needs.
• IRS pre-approved plans are provided by plan professionals or financial institutions and have fewer options.

You have until the due date of your tax return to adopt a profit-sharing plan for that year. You're bound by the terms of the plan document, and your plan document may need to be amended from time to time for new law changes.

Eligibility and participation

An employee becomes a participant in a profit-sharing plan when they meet the plan's eligibility requirements. Employees that are at least age 21 and work 1,000 hours over the 12-month period after being hired become participants on the next plan entry date.

If you have ownership interests in another business, the employees of that business may be eligible to participate in your plan. It may be possible to exclude those related employees, but your plan will need to work with your plan professional to determine if the plan meets coverage testing.

Contributions

The plan sponsor decides how much to contribute to eligible participants' accounts in the plan. Contributions made to a profit-sharing plan must be allocated among the participants by a formula outlined in the plan document. Many plans decide to give a set percentage of compensation to all participants.

Contributions and forfeitures (nonvested employer contributions of terminated participants) are subject to a per-participant annual limitation. This limit is the lesser of:

• 100% of the participant's compensation, or
• $58,000 for 2021

The deduction for the contribution cannot exceed 25% of total eligible compensation.

Vesting

Vesting is the percentage of the account that the participant owns, based on years of service. A year of vesting service is normally given for each plan year a participant worked 1,000 hours. Vesting schedules range from 100% vesting after 1-3 years, or 20% vesting for each year, leading to 100% ownership after six years.

Resources

• Publication 4806, Profit Sharing Plans for Small Businesses PDF
• Profit-Sharing Information Webpage

Nonetheless, you may need to review the "Eligibility and Participation" section as well as "ELIGIBILITY YEAR OF SERVICE", "EMPLOYMENT COMMENCEMENT DATE", "PARTICIPANT", "PERIOD OF SERVICE".

Based on the original message, all accumulated service prior to the plan being reinstated on 1/2024 would be considered null and void because John was under the age of 21.

Even if he had met the plan minimum requirements, per IRS regulations and governance, those credited services would still be deemed null and void.

Based on information in the original message.

Key Takeaway:

Review the Company's Profit Sharing plan prior to any amendments and reinstatement and verify in the language the different topics as listed above and check with counsel.

When did John first become age 21?

When was his employment Commencement Date?