How to handle part-timers in a plan with 3-month eligibility for parti

[MR]

Lets say you have a client that is a golf course, which employs about 200 part-time staff throughout each year. They have a 3-month eligibility requirement, so most of these employees are eligible. Very few participate. The course considers them still employed on 12-31, since most will be coming back to work in the spring. Question is - what is my number of participants at the end of the year? You could make an argument that I have over 100, since there are that many that are eligible. In the whole plan, there are about 30 who make contributions. I'm looking for a way to keep the number under 100, to avoid an audit. Any thoughts?

[rcline46]

After the last check the summer help have terminated. They are NOT employed at 12/31. There is no employer / employee relationship.

However, you document had better say once eligibility has been satisfied, the become participants on date of rehire, so become participants next season. Note special break in service rules apply here.

For 5500 purposes, you are under 100 lives.

[AndyH]

I'm not sure I agree. I don't have it with me, but you should look at the 5500 definition of participant. I know the 1998 definition said it included a person "earning or retaining" credited service. You might technically have to include anyone who was a participant during the year who did not work less than 501 hours.

Bad design. Either way, have it changed.

[Kristina]

I disagree with rcline46 and agree with AndyH. Seasonal employees are never terminated until the next season. (If they don't come back, they terminated. If they return the following season, they had a 1-year break-in-service.) Therefore, they are retaining credited service and are included in the participant count for 5500 purposes.

This plan would only have to file as a large plan if the count was over 120 for the year in which it went from small plan to large plan. However, do you know what year that was??

This is why pension professionals should never use the term "part-time" or "Part-timers" and should train their clients to think in terms of over 1,000 hours or under 1,000 hours. Whoever designed the plan eligibility requirements did not ask the correct questions at design-time.

[rcline46]

Cites please? The 5500 participant explanation for 'retaining service' refers only to those deferred vested participants with account balances. It is not contemplated that it cover former employees who might someday return to work.

For example, no one counts on the 5500 a former employee who worked over 1000 hours (actually 500 hours) and was paid therefore having a zero balance. This also applies to seasonal employees. If someone feels strongly they ought to be counted, then they should be able to point to a DOL regulation. If you want to follow the lay off regulations there is some consideration, but if no account balance then I still would not count them.

Cites anyone?

[Kristina]

1. IRC 410(a)(1)(A)(ii)and ERISA 202(a)(1)(A(ii) provide that you may not require more than 1 year of service to enter the plan. The Plan in question requires 3 months. Therefore, any employee who works three months is eligible to become a participant in the plan.

2. Part time or seasonal employees can not be excluded by category as this would be an impermissible service condition per Treas Reg 1.410(a)-3(e)(2)m, Example 3.

3. Under IRC 410(a)(4) and ERISA 202(a)(4) once an employee has met his eligibility requirements (3 Months in our example plan), he must enter the plan on the earlier of: the first day of the plan year; or 6 months following such date. Therefore a seasonal employee, hired on March 1, 1999, still working on 6/1/99, would enter the plan on 12/1/99, unless the plan provides for an earlier entry date.

4. Because this employer has the following procedure "The course considers them still employed on 12-31, since most will be coming back to work in the spring", our sample employee is a participant in the plan on 12/31/99.

5. Vesting credit. IRC 401(a)7, 411 & 416(B) make compliance with minimum vesting a condition of plan qualification. The plan must define the vesting computation period. Let's say our employee worked 1,000 in 1999 and 1,000 hours in 2000, and our employee is over the age of 18. Our employee has earned 2 vesting years. There is no requirement that his service be consecutive. Note that even though he may not be working in December, January and February, he has not incurred a break-in-service.

Let's say the plan is using elapsed time to credit vesting service. The severence from service date is the first anniversary of the date an absence from employment for reasons other than quit, retirement, discharge or death began. Period of service continues per Treas. Reg 1.410(a)-7(B)(2).

6. No where in the 5500 instructions does it say that in order to be included in the participant count that one has to have an account balance.

7. The 5500 instructions state that "This category (active participants) includes any individuals who are eligible to elect to have the employer make payments to a code section 401(k) qualified cash or deferred arrangement." Being eligible to elect does not mean that one had to elect.

Consider, for example, who would receive a safe harbor contribution if the plan had elected the non-elective 3% safe harbor.

[Richard Anderson]

I agree with rcline46,

From 5500 instructions defining "Participant"

"...Active participants also include any nonvested individuals who are earning or retaining credited service under a plan. This category does not include (a) nonvested former employees who have incurred the break in service specified in the plan or (B) former employees who have received a "cash-out" distribution or deemed distribution of their entire nonforfetable accrued benefit."

The phrase "nonvested individuals" clearly does not intend to include someone with no accrued benefit who is zero vested in that zero benefit. But, even if you believe the intent is to include a "nonvested individual" with a zero account balance, then they fit (B) above. They have a "deemed distribution" of their zero account balance.

I see no intent in the instructions to include in the definition of participant a terminated participant with no account balance.

[Kristina]

The key is "former employees". When do seasonal employees become "former employees"?

[rcline46]

The IRS has declined to issue any regulations relating to seasonal employees since 1974. Total reliance is given to 1000 hour rules or elapsed time rules. With a 3 month eligibility, it is true that these seasonal employees will enter the plan. Kristina is correct that if the plan is using elapsed time rules for all purposes, not just eligibility, the situation will be different. Absent MR tellilng us otherwise, I am assuming that the 1000 hour rules apply. I also assume the plan contains deemed cash out rules.

Now to Kristina's crucial question, when does an employee become a former employee? If an employee is laid off or on a leave of absence, I would not consider them former employees until the lay off (assuming intended to be temporary) of leave expires and the employee does not return to work. In the case of seasonal employees, and I do have clients, including a golf course, with seasonal employees, the operation terminates the employees at the end of the season. Next season, if the employee wishes to return to work they are hired without doing an application. In between there is no employer/employee relationship. If they did not participate in the plan they had a deemed distribution. Without a break in service, they are immediately eligible upon rehire. But at 12/31 they are NOT included in the 5500 count. That is how we handle it.

[MR]

Rcline's assumptions regarding the 1000 hour and deemed payout provisions are correct for this Plan. Our golf course operates in the same way, terminating its employees and then offering them the job back again in the spring. We have elected not to consider these folks participants on December 31st. We've also decided to change the eligibility requirements.

Thanks for all your input.

[Kristina]

I assume you changed from:

"The course considers them still employed on 12-31, since most will be coming back to work in the spring."

[MR]

Yes. In fact, I contacted the client to readdress this issue and, with no prodding from me, was informed that they do consider the employees terminated as of year-end.

[AndyH]

In that case, I think you can not count the people in question if the plan has deemed cashout language, or if they have incurred a break in service, but otherwise I think they're participants on account of "retaining credited service".

[Kristina]

In this case, that administrative procedure makes the difference. Under this administrative procedure of terminating them at year end, I, too, would probably not count them if there were no vested account balance.