Year of Service Match

Is there a violation of minimum participation rules here, or is there additional testing required with the following plan design? An ERISA 401k calendar year plan has 1 year of service/1000 hours for eligibility (anniversary year then switch to plan year) and a tiered year of service match formula with tier 1 drafted as follows 1- 7 years 25% match (8-14 years 50% etc), and Year of Service for the match formula defined as 1000 hours in the Plan Year (in practice credited at year end), are there any minimum service/participation concerns under ERISA? Example employee completes eligibility on June 26, 2024, with an entry date of June 28, but is not credited with 1000 hours of service in 2024 until 12/31 and then 1/1/26 receives the first match. Seems a plan design flaw but trying to determine exactly what the issue is? Appreciate your thoughts!

I’m very confused by your dates. They enter the plan in June 2024. They work 1000 hours in calendar/plan year 2024. 
 

Why is the 2024 match getting deposited in January 2026?

Let’s say he enters the plan on June 28 but does not have 1000 hours until 9/15. The plan administration is to credit the tiers on each 12/31 so that on 1/1 the person starts the match at tier 1. I think it would be too complex to credit each newly eligible at various times in the plan year when they happen. To hit 1000 hours. And the plan uses annual based compensation but funds it more frequently. It sounds like maybe this person is due a true up at year end? Would a better design be to have tier 1 start at 0 years, or use anniversary years to determine at least for the first tier 1?

Thanks! 

@30Rock from your comments, it sounds like the plan design is:

• The initial eligibility computation period (ECP) is the first 12 months of employment and an employee must work at least 1000 hours in the first ECP to be eligible to make deferrals into the plan.  In your example, the employee's first ECP ended June 26, 2024.
• If the employee meets this requirement, the employee begins participant as of the next entry date (which sounds like this plan uses the next payroll date).  The employee entered the plan on June 28, 2024 and starts deferring.
• At the end of the plan year on December 31st, employees who have deferred during the year receive a match if they have completed at least 1000 hours during the year.  As of 12/31/2025, this employee has 2 years of service and has more than met the requirement to get a match for 2025.

It seems the conundrum is the company is funding the match during the year, but the match really is an annual match.  Since the funding occurs more frequently than the match period, the plan must make a true-up match.

This plan has an issue if an employee was deferring and getting a concurrent match, but then terminated employment before working 1000 hours during the year.  There would be a match in the employee's account that the employee is not entitled to have.  The issue could be exacerbated if the match funding also was anticipating an employee working 1000 hours in a year where the match percentage was going to increase to the next level.

There is nothing inherently wrong with the plan design.  The issues arise because of the funding frequency of the match.

So looking at 2024 plan year only, when does the tier 1 match start or accrue - 12/31 or as of the date they complete 1000 hours? Let’s say this employee completes 1000 hours on 9/15/24 and is deferring. It’s an annual match but funded per payroll then a true up is done at year end. 

If the match is an annual match, technically it is accrued at plan year end as of the end of the benefit (allocation) computation period. The tier is determined at the end of the year when the match is allocated to the participants' accounts.

You could write language into the plan the explicitly adjusts the tiers when an employee has worked 1000 year-to-date, but that would be creating the problem that you want not to have and don't have with the current design.

Again,  there is nothing inherently wrong with the plan design.  The issues arise because of the funding frequency of the match.

I was re-reading your comment above. The match is annual but does not have a 1000 allocation requirement. So it can be funded per payroll with a true up at year end. The movement on the tier is based on whether you complete 1000 hours in a plan year. So I could receive a match each pay period but at year end if I did not complete 1000 hours then I do not accrue a year of service for purposes of gaining another tier. So I stay on my prior tier. There is no pre funding issue. Agree?

There is no pre-funding issue as long as there are no other plan provisions (other than vesting) that could cause the participant to give up the pre-funded match.

The task remains for the plan to have explicit provisions about when the gets incremented.  This should be done in the definition of the match formula.  Take care in drafting the provision since it will impact the calculation of the true-up at plan year end for participants who on the threshold of getting to the next incremental rate.

I suggest modeling some numbers illustrating for the client how this would work in practice so they understand clearly how to operate the plan.

Yes I agree. This tiered formula is more complex than I thought, and I see the need for very clear document language so the tiers can be properly administered. Thank you so much for your help!

A Tiered formula is subject to BRF (Benefits, Rights and Features) Testing. 

Yes correct we are conducting ACP and BRF. One final question on this tier - I realize it requires careful plan drafting but I just want to make sure there is not a disguised service condition or ERISA violation. So, plan has a one-year eligibility requirement of 1000 hours in the anniversary year, then switch to plan year.  Plan Match tier is 1-7 years 25% up to 4%. A Year of Service for purposes of the match is the completion of 1000 hours. Employee is hired on 7/1/24 and completes 1000 hours on 6/30/25 and enters the plan on the 7/4/25 payroll. Employee does not complete 1000 hours in 2024 but completes 1000 hours in 2025 on 11/1/25. Plan administrator states they give credit for 1 year of match on 12/31/25, but do not start the match until the first payroll beginning on or after 1/1/16. Is this an issue? Participant completes 1000 hours in the eligibility period and enters the plan and completes 1000 hours in 2025, yet no match until 2026. Is this just a matter of drafting the plan properly or is there an ERISA violation?