Rehires and Rule of Parity

I'm sure this question is somewhere in the archives, but I cannot locate any threads.

Profit Sharing only plan.

A former employee who worked from April 2013 through October 2015 was rehired in 2021.  We are currently trying to find out from the employer whether this participant - although they were eligible for the plan on January 1, 2015 - received an allocation for 2015.

The plan uses the Rule of Parity, which always makes me shudder a bit.  My understanding is that if a participant has more than 5 breaks in service and they were not vested at the time of termination, it is permissible to start from ground zero when they are rehired.

In this particular instance, the participant would have been 20% vested at termination.  She is not likely to have been eligible to receive a Profit Sharing for 2015 due to her termination prior to the end of the year.  (We are waiting for confirmation from employer since we do not have history).

My question:  Would prior vesting service but no vested benefit permit us to rely on the Rule of Parity?  OR was she immediately eligible for the plan on her date of rehire in 2021 because, although she may have never accrued a benefit in the plan, she had nevertheless accumulated vesting service?

Thank you!

That's a tough one. You pays your money and you takes your chances. The statutory language in IRC 410(a)(5)(D)(iii) defines a nonvested participant as one who does not have any nonforfeitable right to an "accrued benefit derived from employer contributions."

1.411(a)-7(2) defines an accrued benefit as "the balance of the employee's account held under the plan."

It would seem pretty reasonable to argue that you could use the rule of parity here, even if "vested" assuming there is no account balance.

I'm not sure there is any guidance directly on point for this question - and of course, document provisions rule...

This is the type of situation where you need to read the plan document carefully to sort out three different topics, each of which can have its own rules that may look very similar or very different from each other within the document.  The topics are:

• Eligibility
• Vesting
• Benefit accrual (for a PS plan, allocation conditions)

It is possible, for example, for a rehired participant in a plan that uses rules of parity for determining eligibility to not be eligible.  If the same plan uses elapsed time for vesting service, that participant could be vested.

Within the rules of parity, there can be a distinction between pre-break service and post-break service.  It is best to see what the plan document says for calculating eligibility service and vesting service.

Be on the lookout one of the trickiest provisions where a rehired participant gets retroactive credit for pre-break service only after the participant completes one year of service after returning to service.

Another tricky part of applying the rules of parity is that the rules use a Break-in-Service to determine when a participant counting consecutive One-Year-Breaks-in-Service.  A participant may, under the plan provisions, have worked more or less than 500 hours (particularly in the year of termination or year of rehire) which can impact the count.  Note this count also can be impacted when the participant's Eligibility Computation Period shifts from the first 12 month's of employment to the plan year.

What is amazing is these rules been in existence since 1975 and somehow have survived.

Good luck!

Unless two-year wait, which = full vesting, how was this person not eligible 7/1/2014? With a 4/2013 hire, 1/2015 entry would violate 18-month maximum hold out.

That's an interesting point CuseFan, and one that did not even cross my mind . . . Actually, it makes me shudder just a little more.

On 9/18/2023 at 12:57 PM, CuseFan said:

Unless two-year wait, which = full vesting, how was this person not eligible 7/1/2014? With a 4/2013 hire, 1/2015 entry would violate 18-month maximum hold out.

Well, perhaps consider the following scenario. (Excerpt from OP below.) Let's assume, just for the heck of it, an April 15, 2013 DOH. First eligibility computation period is 4/15/2013 to 4/14/14. Less than 1,000 hours in that period. Second eligibility computation period is calendar year 2014, with 1,000+ hours. So entry date is 1/1/2015. Furthermore, if 1,000 hours in 2015, would have 2 years of vesting service, so under a 6-year graded, would be 20% vested. Seems possible, although not necessarily likely. Not enough information yet to tell.

"A former employee who worked from April 2013 through October 2015 was rehired in 2021.  We are currently trying to find out from the employer whether this participant - although they were eligible for the plan on January 1, 2015 - received an allocation for 2015"

We could just stipulate no rehires in the service agreement...

I do believe we have a document problem that will have to be addressed after October 15.  This particular provision cannot work with annual entry dates.  Anyone hired prior to July 1 in any given year is going to go beyond that 18-month maximum service requirement for plan entry. 

Again, I appreciate you bringing this to my attention.  I was so focused on Rule of Parity, it didn't even dawn on me that the plan provisions were unworkable.  I'm surprised the document provider would even permit the "coincident with or following" box to be checked if the plan provided for annual entry!  

We're going to have to examine history (this was a takeover in 2021), and figure out whether this is going to require a VCP filing.  I don't have the bandwidth to whiteboard what we have in front of us right now . . .

Marking my calendar for post tax-season fun!