Any statutory rule against one-year hold-out from 401(k) deferrals for

[John A]

Is there any statutory rule against the "one-year hold-out rule" for a rehired employee as applied to 401(k) deferrals? What happens if a 401(k) plan does have a one-year hold-out rule and the rehired employee participates retroactively? Is the plan sponsor then required to make QNEC contributions under self-correct for the rehired employees inability to defer during the hold-out period?

[Richard Anderson]

I think there is no right or wrong answer to this. But, here's my thoughts on it.

The retro entry after meeting a year of service makes no sense for 401(k) deferrals. So, if your plan document says that rehires enter retroactively to date of rehire after meeting YOS; you can interpret that in two ways:

1. Retro entry for deferrals makes no sense; therefore, for the deferral portion of the plan, the participant must be eligible to defer immediately upon rehire.

2. Retro entry for deferrals makes no sense; therefore, after meeting the YOS requirement the participant is allowed to begin deferring immediately. This option takes the position that since you can't retroactively defer, the retro requirement does not apply to the k portion of the plan.

I think either method can be defended, although obviously method 1 is the more conservative of the two. This is a case where the plan administrator gets to interpret the plan document.

When we help the plan administrator interpret their document, we encourage immediate entry for deferrals on rehire.

If you think that interpretation 2 is valid, then no QNECs are required. If you believe interpretation 2 is wrong and 1 is the only correct interpretation, then the plan will need to be corrected and QNECs would be required.

[Guest Hans Moleman]

I am not so sure that allowing a participant to defer immediately upon rehire when he technically must satisfy a one year of service requirement is conservative. What if he never completes the year of service? Then he never should have re-entered the plan and his deferrals never should have happened. Then what?

The obvious solution is to never have the BIS rules in a 401(k) plan.

[John A]

Hans, the problem with the obvious solution is that there are takeover situations in which someone else has already invoked the BIS rules for a 401(k) plan and there are rehires before the plan has been amended to remove the BIS rules. Thus, the obvious solution is not a solution at all concerning what to do once the situation has regrettably occured.

[Guest Hans Moleman]

I was speaking in a general sense, not accusing you of poor document design. If everyone were to not have BIS rules in 401(k) plans then that is a solution to this type of problem.

[John A]

Agreed. And I apologize if I sounded antagonistic or overly defensive. I am simply seeking what to do in a situation that should not have happened in the first place.

[Richard Anderson]

"What if he never completes the year of service? Then he never should have re-entered the plan and his deferrals never should have happened. Then what?"

What if he completes a YOS without being allowed to defer? Now he retroactively must be allowed to defer, but you didn't allow him to? Now what?

[Guest Hans Moleman]

"What if he completes a YOS without being allowed to defer? Now he retroactively MUST be allowed to defer, but you didn't allow him to? Now what?"

Richard, you posed two solutions, so you MUST not feel that he MUST be retroactively allowed to defer.

[Richard Anderson]

"Richard, you posed two solutions, so you MUST not feel that he MUST be retroactively allowed to defer."

You are right, I think either of the two will probably work, but I like # 1 better. Since it is impossible to retroactively defer, you must ignore something in this rule. You can ignore the retro part and enforce the YOS part. Or, you can ignore the YOS part.

Which way is best for the employer and worst for the employee? Ignoring the retro part makes the employee wait a year before deferring and he misses any match on those deferrals (option 2). Ignoring the YOS part allows the employee to begin deferring immediately, and not miss out on matching contributions (option 1). Since option 1 is the best for the employee, I think it is the most conservative approach.