Rehired Participants

A plan sponsor from time to time rehires employees - sometimes several months, sometimes 3 or 4 years after being terminated.  These employees occasionally were participating in their 401(k) plan prior to their termination and are deemed to be participants immediately when rehired in almost all circumstances, according to the plan document.  The sponsor has asked whether it would be possible to force such rehires to meet the eligibility requirements all over again after they are rehired if they were previously terminated at least a year before their rehire date - I'm thinking it's probably impermissible to do this.  They're currently using an FT William doc coded for the basic rule of parity provision, however, the program allows for modifications as an open entry item, i.e., anything at all can be written in to customize this provision, and the question of whether amending the plan to use this open entry item to enforce the one year restriction mentioned above arose.  Is it legal to force requalification for such rehires after being away only one year?   

My understanding is that at a minimum you must count prior service for eligibility (and vesting) unless it can be ignored under the rule of parity. You can be more liberal but not more restrictive. You can also employ the one-year holdout where such prior service is not recognized until another year of service has been earned but then participation is retroactive to the date of rehire, not a new current entry date. I do not know how you deal with the salary deferral (and match) dilemma in such a situation, which is likely why 401(k) plans don't typically run that way - more prevalent in pensions - and I haven't done 401(k) admin in ages so I'm sure others out there have a better handle on this than me.

And remember, if someone does not have at least a one-year break-in-service based on plan's definition, upon rehire they are treated as never having left.

Ken is right. It would be much easier to never rehire a terminated participant. 

There is no way to do what the client wants if the former employee even had $1 of employee deferrals in the 401(k) plan.  The Rule of Parity says it only applies if they never had a vested balance with the old service. 

See the older discussion of the topic. 

Hope that helps. 

Great - I agree with what's being said.  Thank you for the comments and the Rule of Parity link.  I believe the only situation that wasn't addressed was what if the participant had 2 -4 BIS and never had a nonforfeitable right to a benefit - would prior service be disregarded?

How much of what the plan sponsor seeks might be accomplished by setting as allocation conditions for a nonelective or matching contribution 1,000 hours of service in the year and employed on the last day of the year?

(I ask this as an open-ended question; I don't know the workforce Connor describes or why the plan sponsor seeks to restrict reentry.)

The only contribution the sponsor makes is a safe harbor match, so the eligibility requirements for allocations cannot be restricted.  The reasons the sponsor wants this are for 1) administrative ease mostly, and 2) smaller contributions secondarily. 

On 9/13/2025 at 8:47 PM, Connor said:

Great - I agree with what's being said.  Thank you for the comments and the Rule of Parity link.  I believe the only situation that wasn't addressed was what if the participant had 2 -4 BIS and never had a nonforfeitable right to a benefit - would prior service be disregarded?

 

I think the 2-4 BIS situation was addressed in the Ferenczy article linked and in the rule itself, and most likely the base document description of the Rule of Parity. 

It says:

Another optional election that can be made is the Rule of Parity. If a plan has this rule, it applies only to individuals who were not vested in any benefit when they terminated employment. Under the Rule of Parity, a rehired employee’s prior service is disregarded if the employee’s breaks-in-service exceed either the number of years of service s/he had prior to the breaks, or five years—whichever is greater. If the employee’s breaks-in-service do not exceed the greater of those two periods, the service prior to termination must be counted for eligibility purposes.

I can't imagine your plan document doesn't repeat that rule some place.  

I just think it is hard for a person to have 2-4 years of service in any kind of plan that is making any kind of contribution to have no vested benefit.   But since a 4k plan employee deferrals count as a vested benefit that makes it all the rarer.   For this reason I prefer once a participant always a participant plans.   Attempts to use the rule of parity adds a lot of work and complexity to keep out what is typically a pretty small percentage of all rehires.  

I think I got hung up on "five years - whichever is greater".  I thought it was referring to the prior YOS - quite a convoluted sentence - no wonder the author of the article said it was "a real nightmare of a topic".

We use FT William's doc which uses a more simplified version as default language for the Rule of Parity: "If an Employee does not have any nonforfeitable right to the Account balance derived from Employer contributions, Years of Eligibility Service before a period of five (5) consecutive One-Year Breaks in Service will not be taken into account in computing eligibility service. Elective Deferrals are taken into account for purposes of determining whether a Participant is a nonvested Participant for purposes of Code section 411(a)(6)(D)(iii)."  This is also their default for the Rule re vesting service.  We've used other vendors and have seen various docs from takeovers & if I recall correctly just about all of them had language similar to FT William's.  I guess we have different experiences, ESOP Guy, but that's one of the things that makes this board worthwhile.

The only employer contributions made to the plan in question are safe harbor matches, so it's actually not that rare for participants not to defer, and thus not get any match, and then they terminate with perhaps several YOS but no vested benefit.  I definitely would prefer the 'once a participant always a participant' approach but we have quite a few clients protesting even the use of the above Rule.

Thanks everyone!

Concerning a profit sharing plan, let's say a participant terminated in 2014 and was paid out in 2017, incurring more than 5 consecutive YOS, was rehired in 2023, worked less than 1000 hrs, even less than 500 hours.

Would not this individual enter the plan immediately but not receive a contribution due to hours worked in 2023.

Plan says 1000 hours for contribution.

On 10/5/2025 at 7:45 AM, thepensionmaven said:

Concerning a profit sharing plan, let's say a participant terminated in 2014 and was paid out in 2017, incurring more than 5 consecutive YOS, was rehired in 2023, worked less than 1000 hrs, even less than 500 hours.

Would not this individual enter the plan immediately but not receive a contribution due to hours worked in 2023.

Plan says 1000 hours for contribution.

The question of when a person enters or re-enters a plan and if they get a contribution are two separate questions. 

I am constantly telling clients to stop mixing the two together. 

You first decide if the person is a participant.  

If not, they can't get a contribution. 

If so, you see if they meet the requirements to get a contribution allocation.  

So yes a person can re-enter and if they work too few hours not get a PSP contribution.