Vesting credit for partial year of employment

[Guest meggie]

I have a plan that grants 1 year of vesting credit if worked 910 hrs and 1 year of credited service if worked 1820 hrs. Partial credit for credited service is granted if worked less than 1820 hrs and is determined as hrs/1820.(If worked less than 910 hrs in the plan year, then no partial credit for benefit accrual is granted for that full year. On the other hand, partial credit is given in the 1st yr and last yr of employment if not a full plan year)

Question: Is it okay to grant partial vesting credit in 1st yr or yr of termination based on hrs /1820? or should the calculation be based on hrs/910? I'm thinking that either approach is acceptable since it is more generous than statute. Any comments?

[Guest Benefits Maven]

As long as you are doing better than you are required to do by law, then its all up to your plan document. Sounds like hrs/1820 makes more sense, but that's just an opinion.

[RCK]

I am not answering your question--I'm off on a tangent. What kind of benefit formula does this plan have?

[Guest meggie]

The benefit formula is final average pay (36 months) multiplied by years of CS.

[RCK]

OK. I don't understand. If you skip the details, someone who works 60% time gets 60% of a year's credit and 60% of pay, for a benefit of 36% of a full time benefit?

[david rigby]

I would urge caution about giving partial credit in first and/or last year. This is because the "last year" is at date of any termination, not just retirement. Employee could be rehired.

Note that you are already giving partial credit when hours are between 910 and 1820. If the employee terminates and is rehired in the same plan year, then the employee might get more credit than someone who works the same number of hours but does not terminate.

If it is important to give partial credit, maybe you could use elapsed time method, but this has drawbacks also.

[AndyH]

I don't know why, but I have rarely seen plans that give partial credit for vesting. I'm not sure why that is, perhaps to minimize recordkeeping.

Even most (single employer) union plans that I've seen that give partial credit for benefit purposes have all or nothing vesting service.

Any comments on that? I suspect it's just an unneeded hassle.

[david rigby]

I agree with Andy. In fact, in 20+ years, I have never seen a plan that calculates vesting service in fractional years, except for plans which use the elapsed time method for everything.

[Guest meggie]

Thanks to everyone who responded. I,too, have only encountered partial vesting credit with elapsed time plans and all or nothing with an hours plan. This plan had been on an elapsed time accrual basis for vesting and credited service and decided to go to an hours basis for vesting since they want CS to be based on hours (as noted earlier).

Would you recommend maintaining elapsed time for vesting accrual purposes if want to grant partial vesting credit and maintain an hours based for credited service accrual? The employee group consists of fulltimers but will be hiring parttimers.

[david rigby]

In deciding which type of service definition(s) to use, the primary issues are usually what type of employee base is covered, and what type of administrative practices are available. For example, if there are many part-time workers, then using the hours definition will often exclude them from participation, vesting, and benefit accrual. That may or may not be the goal of the plan sponsor.

In general, there are trade-offs related to amount of administrative cost and amount of benefit cost.

[mwyatt]

A followup on RCK's comment: This seems to be "double jeopardy" in that if someone is working at a rate over 1000 hours but under 1820 hours, then their accrual for the year is being reduced twice. First for not getting a full year of credited service, and second because they are working on a part-time basis (and hence their salary is lower just by virtue of lower hours worked in year). This type of design is OK for a dollar-based benefit; I think the DOL would have concerns with this design (pre-TRA '86 this was definitely verboten - maybe now washes away if you can satisfy the General Test - definitely not a safe harbor formula by virtue of your definition of Credited Service).

[Guest meggie]

In response to the last comment:

We are taking care of potential double proration by annualizing parttime pay so there should be no issue related to double proration.

[david rigby]

Caution! Annualizing compensation for benefit purposes is a very dangerous plan provision. In addition to a zillion different ways to annualize, you may end up getting equal benefits for unequal work/employment/compensation.

I recommend against such a provision.

[Guest meggie]

Pax: I'm not sure I follow. Would you agree that in the absence of annualizing the earnings based on 1820 hrs= fulltime annual pay, that parttimers would be subject to double proration based on crediting partial credit for benefit accrual?

If a person remains parttime for his entire career (910 hrs/yr), we would want that person's benefit to be no more than half of the fulltimer with the same # of years and same rate of pay.

[david rigby]

No I would not agree. It all depends on your definitions and your starting point. By using actual comp, which also helps if you are trying to have a safe-harbor plan definition, you automatically "pro-rate". But just because you decide to award partial years of credit does not also mean that is "double proration."

Seems to me that the partial years of credit is intended to reflect less than "full-time" work. By annualizing the comp , you will be negating that philosophy.

In addition, you open the door to many idiosyncracies in the future. Consider someone who works full time, perhaps even overtime, but who terminates and is rehired within the same plan year. Annualizing comp for this person might, depending on definitions, give this person more credit than someone who worked the same hours and comp but did not terminate.

Another example might be employees who often terminate and are rehired, even several times over a career. The same problem could easily happen.

[RCK]

meggie, I agree with your concern. If someone works half time and gets half pay, then it does not make sense to give them one quarter benefit--which is what you do if you count actual pay and give partial benefit service. You have to adjust one of the factors.

I do agree with pax' earlier comment that you have to be very careful about annualizing earnings. But if you insist on the partial credit approach, then you're going to have to address this in order to end up with a reasonable result.

I also think that the problem is greater if your formula is integrated or stepped in any way on either earnings or service.

RCK

[david rigby]

Bingo! That is (part of) the point. Annualizing any comp will open the door to unintended distortion and undesired comparisons. Don't do it.

[Guest meggie]

thanks to everyone. I guess I have a lot to think about-incidentally, the formula is not integrated. I'm not sure about OT or bonuses- so that would be a different concern relative to annualizing pay.