Layed off employees - when do they enter a plan that has a 6 month ser

[Guest michaelv]

A construction company has a 401(k) Plan with a 6 month service eligibilty requirement, with monthly entry. The company does have a high number of employees who get temporarily layed off do to low work orders at any give time. It does not appear that this is due to "seasonal" conditions.

What would happen in the following situation: Employee is hired 1/1/01, works 4 months, then is layed off for 3 months, then comes back and works the rest of the year. When does he enter the Plan?

Check the Plan document you say? Document does not address what to do in these situations. I even spoke with the document provider (national document firm) who confirmed this. I was hoping to see in the definition section of the document something that would say that an employee is someone who is providing services to the employer, but no such language is in there.

Important fact is that the employer continues to pay for health premiums and certain other fringe benefits for the employees while they are layed off.

This last point leads me to believe in the above situation, the employee is in the Plan on 7/1/01. Because he is receiving some form of ongoing compensation from the employer (eg health premium payments), he must still be considered an employee, even though layed off. But since he did not work even 1 hour in those last 2 months, does that trump the fact that he is receiving some form of compensation in those months, meaning he is not in on 7/1/01?

Any comments are appreciated.

[David MacLennan]

With respect to the minimum eligibiltiy/participation requirements, you generally have to credit all years of service for eligibility unless one of the 3 break in service rules applies. The problem you are facing it seems is that these minimum rules are expressed in years of service, so that with monthly periods elected for eligibility the document language breaks down or is inconsistent.

Your plan document can have any rule regarding eligibility they want (e.g., continuous 6 months, service disregarded for greater than 6 month absence, etc.) as long as the minimum statutory eligibiltiy rules are given as a default. Your plan document would then be structured with 2 gateways for eligibility, the statutory and the plan sponsor selected. Of course, most prototype documents don't do this properly with montly eligibility, and the client may not want the expense of a volume submitter or individually designed plan document.

Perhaps a more practical solution may be to always count prior months of service unless the (annual) break in service rule(s) found in the doucment apply. This may be the best interpretation you can do.

I don't think the health premiums, etc. create Hours of Service for eligibiltiy, but again the document should address what service is considered for eligibility.

Sounds like you have a poor document that needs fixing. I like to warn the client about "operational errors" found during an audit, which will hopefully motivate them to pay for a proper document or amendments.