Tricky Rehire Question

[HTO]

Employer maintains a 401(k) plan and an ESOP.  Employee who was a participant in both plans terminated employment in 2018 with vested benefits and was rehired in 2024 on a part-time basis. Both plans used the one year holdout rule (not applicable to deferrals under the 401(k) plan), so the employee became a participant for purposes of deferrals under the 401(k) plan upon rehire, but was not eligible for 401(k) match or ESOP allocations, subject to completing a Year of Service.  The employee has not completed a Year of Service in any computation period since being rehired. 

Effective 1/1/2025, the 401(k) plan was amended to become a safe harbor plan (with safe harbor matching contributions), and both plans were amended at that time to remove the one year holdout rule and provide that rehired participants become participants on the date of rehire.  The employer has not treated the rehired employee as a participant for the safe harbor match or the ESOP, believing that the one year holdout rule still applies to her, but the TPA believes that the employee should have become a participant for both the safe harbor match and the ESOP as of 1/1/2025.

I am leaning toward the TPA's position, particularly with respect to the safe harbor match (it doesn't seem like the plan would satisfy the safe harbor if a participant is eligible for deferrals but might not be eligible for the match).  The ESOP is a bit fuzzier, but the TPA's position seems logical in that the removal of the one year holdout rule should apply to all rehires, but not retroactively to a date prior to the effective date of the amendment.

Thoughts? 

[WCC]

FWIW I agree with the TPA. When the one year holdout rule was removed on 1/1/2025, what provision in the restated documents keeps this person out of the plans? Did the amendment say "...any rehire before 1/1/2025 must still satisfy the one year holdout rule and any rehire on or after 1/1/2025 automatically re-enters"?

[Paul I]

@WCC highlights that how the plan amendment is worded impacts whether and when this individual can re-enter the plan.  If the wording simply deleted the rule, then this individual is an active employee who has met the current eligibility requirements of the plan.

Regardless of the final determination, how much impact would there be by letting this employee in the ESOP?  Is there a 1000 hour allocation requirement?  Are there rules of parity that would have wiped out previous vesting service?  How high is the participant's compensation on which an allocation would be based?  How far back does the company have records to determine if anyone else in the future is hired was previously employed by the company before the amendment was adopted?

In short, is the cost of letting this employee in worth worth the cost having to administer a hold-out provision?