3 months eligibility with 520 hours

An employer wants to have a 3 month eligibility and 520 hours worked within the 3 month period.  I was very confident telling the employer that if you want to attach an hourly requirement to a shortened eligibility period, using 1,000 hours for a 12 month period as my base, hours would need to be prorated accordingly, i.e., 250 hours for a 3 month eligibility period.  The advisor pushed back, asking for the document provision that does not allow 520 hours worked in a 3 month period.  Reviewing the adoption agreement and basic plan document, there actually is nothing in the document that prohibits having this in the adoption agreement.

The employer is aware of the LTPT rules and also aware that no matter what the plan's eligibility requirement is, if an employee completes 1,000 hours in a 12 month period, they must be allowed to enter the plan unless they are in an excluded class.

Does my alternative arguement to not allow this in the document hold water?

While the document allows flexibility, IRS rules under IRC §410(a) still apply:

• A plan cannot impose eligibility conditions that effectively prevent participants from qualifying within the maximum permissible timeframe.

• If you reduce the service period to 3 months, the required number of hours must be reasonable for that duration. 520 hours over 3 months (~40 hrs/week) is seen as unduly restrictive by IRS standards.

Therefore, even if the document doesn’t prohibit it, adopting a 520-hour rule in a 3-month window could jeopardize plan qualification if audited.

I respectfully disagree with your interpretation. Basically, I'm assuming that your document is pre-approved language. If so, almost certainly it will have some sort of "fail-safe" language. For example, that if the Eligible Employee does not complete the stated hours of service requirement in the specified time period (in your case, 520 hours in the 3-month period) they will become subject to the 1 Year of service requirement. Which of course, is 1,000 hours.

Where in 410(a) do you see anything where the IRS indicates that 520 hours in 3 months is unreasonable or unduly restrictive? As long as the plan is written such that you can't violate the age 21/1 YOS standard (or 2 years if 100% vested) you should be fine.

I'm oversimplifying here, I know that...but I don't want to delve into every possible permutation!

I agree with Belgarath. Many pre-approved plan documents have sections where eligibility for full-time employees and part-time employees can be set separately. 520 hours in 3 months is very similar to saying full time employees need 3 months of service. Those same documents tend to have the fail-safe language that Belgarath mentions so that even if someone is not in after 3 months, they would satisfy eligibility with the maximum 1 year of service with 1,000 hours. 

Agree, just be sure the basic document provides for eligibility failsafe at 1000 hours in 12-month computation period.

Thank you all for taking the time to respond - and that is how the prototype document reads.

@jsample, out of curiosity, is the language you note in the prototype document a comment or notation in the adoption agreement, or is it a provision in the Basic Plan Document (or both)?  I have never seen this in a BPD, but have seen some AA's where attempts at explaining a provision are off the mark.

On 8/2/2025 at 3:39 PM, jsample said:

Therefore, even if the document doesn’t prohibit it, adopting a 520-hour rule in a 3-month window could jeopardize plan qualification if audited.

I suggest that using 520 would cause problems on audit.  Specifically, you might need to show that the impact of this provision would unfairly benefit the highly compensated employees, so testing might be needed.  Regarding the "must be reasonable" aspects, I suspect you could have a problem here, but I also agree that the 1,000 Hour "fail safe language" may eliminate all problems.