1 year of Service

A document is written:

Normally a plan with 1 year of service and 21 is written:

You will be eligible to participate for purposes of salary deferrals when you have completed one (1) Year of Service and have attained age 21.

But for some reason recently it was written as:

You will be eligible to participate for purposes of salary deferrals when you have completed 1,000 Hours of Service within your first 12 month(s) of employment and have attained age 21.

The client is coming back to us saying he thought the eligible was 6 month, based on the above.  I can see his point.  You could interpret it as once I work 1000 hours(6 months for full time employee) I become eligible.  Doing this for years I know it's 1 year but could see his arguement.  Has anyone else seen it written this way?   

Alice in Wonderland?

Read literally the client is correct.  It is late but do you think there is a legal problem with the client's reading?  If not, run it the way they want and in the document.  There clearly is no law that say it has to be 12 months and 1,000 hours.  The only question is is there a law that say you can't say once you reach 1,000 hours in 12 month you enter?

I haven't seen this but I just got a new client whose Year of Service is a plan year where they work 500 hours.  Eligibility says you enter upon being 21 and working a Year of Service.  You enter on the 1st day of the month following.  Everyone seems to agree that means you enter on the 1st day of the month following working 500 hours.  That is the oddest way to say that but odd and not right aren't the same thing. 

31 minutes ago, ESOP Guy said:

Read literally the client is correct.  It is late but do you think there is a legal problem with the client's reading?  If not, run it the way they want and in the document.  There clearly is no law that say it has to be 12 months and 1,000 hours.  The only question is is there a law that say you can't say once you reach 1,000 hours in 12 month you enter?

I haven't seen this but I just got a new client whose Year of Service is a plan year where they work 500 hours.  Eligibility says you enter upon being 21 and working a Year of Service.  You enter on the 1st day of the month following.  Everyone seems to agree that means you enter on the 1st day of the month following working 500 hours.  That is the oddest way to say that but odd and not right aren't the same thing. 

The plan must be administered per the terms of the plan document, not by how a participant interprets a badly worded sentence.  Just reading the plan document's definition section will probably clear up any confusion. 

Quote

"You will be eligible to participate for purposes of salary deferrals when you have completed 1,000 Hours of Service within your first 12 month(s) of employment and have attained age 21"

This sounds like something from an SPD, and I would bet the document itself does not word it this way.  Either way, if the document (other than the badly worded sentence provided) clearly provides for a year of service as a 12 month period during which an employee works at least 1,000 hours, it would be a failure to follow the terms of the document by letting them in early.

And if we really want to be picky, this would only allow an employee to become a participant if they worked a 1,000 hours in the first 12 months of employment, so no dice if you get 1,000 any year after that.  And do they have to be consecutive months?  Or can I quit after 2 months and still count them if Im rehired down the line? 

We had this exact situation many years ago.  I forget the details of the plan document, but the client thought she was doing it correctly... as soon as 1000 hours worked, they enter on the next monthly entry date.  We amended the plan to conform to her operation.

10 hours ago, RatherBeGolfing said:

The plan must be administered per the terms of the plan document, not by how a participant interprets a badly worded sentence.  Just reading the plan document's definition section will probably clear up any confusion. 

This sounds like something from an SPD, and I would bet the document itself does not word it this way.  Either way, if the document (other than the badly worded sentence provided) clearly provides for a year of service as a 12 month period during which an employee works at least 1,000 hours, it would be a failure to follow the terms of the document by letting them in early.

And if we really want to be picky, this would only allow an employee to become a participant if they worked a 1,000 hours in the first 12 months of employment, so no dice if you get 1,000 any year after that.  And do they have to be consecutive months?  Or can I quit after 2 months and still count them if Im rehired down the line? 

I didn't think I said not run the plan according to the terms.  I said read literally the client is correct. 

It says if you work 1,000 hours WITHIN the first 12 months.  So if six months after someone is hired lets say they worked 1,000 hours.  How is that not working 1,000 hours WITHIN the first 12 months?  The odd part of that sentence is the word "within".

By using that word I don't think the sentence requires me to work 12 months, just 1,000 WITHIN those 12 months.  Those 1,000 hours are "in" those 12 months so the requirement has been met.  I see that as the literal reading of that sentence. 

This is why most plans do define it as saying you work a Year of Service.  They then define YOS as a 12 month period and you have to word 1,000 hours during that time.  

By the way I didn't say this is a good definition so yes it has its problems  like do they have to be consecutive or what happens if you don't work 1,000 in the first set of 12 months. 

I do think an amendment would help clear things up. 

Just curious how would you folks write a plan provision to let people enter after they work 1,000 hours and have no months requirement? 

That is in effect what this client is saying they have. 

How could you write that and be clearer? 

@ESOP Guy My comment wasn't the literal reading of the badly worded sentence, it was to your question. 

Quote

It is late but do you think there is a legal problem with the client's reading? 

I do, because I don't think that sentence accurately describes the plan's eligibility requirements. and the law does require the plan to operate by the terms of the document.

And there is no way this sentence alone is an accurate description of the eligibility requirements, as it only talks about the first 12 months of employment.  That alone means that there is more to it since it clearly is not legal to only consider the first 12 months of employment.

If the question is, is there a legal problem with a document actually designed to let people in as soon as they hit 1,000 hours within a 12 month eligibility computation period?  No, I would agree that as long as it is more liberal than the statutory requirement, it is fine.

10 hours ago, chc93 said:

We had this exact situation many years ago.  I forget the details of the plan document, but the client thought she was doing it correctly... as soon as 1000 hours worked, they enter on the next monthly entry date.  We amended the plan to conform to her operation.

48 minutes ago, ESOP Guy said:

Just curious how would you folks write a plan provision to let people enter after they work 1,000 hours and have no months requirement? 

That is in effect what this client is saying they have. 

How could you write that and be clearer? 

We had a plan that used similar language, precisely  because they wanted people to enter without waiting until a full year. It was a nightmare to administer, however.

I'm with RBG, there should be more specific language in the document.  The normal year of service requirement is the default in our VS document.  It doesn't go into detail in the adoption agreement, but the base document says:

Quote

An Employee will receive credit for a Year of Service, as of the end of the Eligibility Computation Period during which the Employee completes the required Hours of Service needed to earn a Year of Service. An Employee need not be employed for the entire Eligibility Computation Period to receive credit for a Year of Service, provided the Employee completes the required Hours of Service during such period.

There are choices in the AA that allow entry based on the date the hours are reached and those options are clear in the AA about how they work.

1 hour ago, RatherBeGolfing said:

@ESOP Guy My comment wasn't the literal reading of the badly worded sentence, it was to your question. 

I do, because I don't think that sentence accurately describes the plan's eligibility requirements. and the law does require the plan to operate by the terms of the document.

And there is no way this sentence alone is an accurate description of the eligibility requirements, as it only talks about the first 12 months of employment.  That alone means that there is more to it since it clearly is not legal to only consider the first 12 months of employment.

If the question is, is there a legal problem with a document actually designed to let people in as soon as they hit 1,000 hours within a 12 month eligibility computation period?  No, I would agree that as long as it is more liberal than the statutory requirement, it is fine.

 

 

Oh sorry I misread your first reply to me.  I get it now.

Just now, ESOP Guy said:

Oh sorry I misread your first reply to me.  I get it now.

No worries 

I've seen documents give this option when choosing 1 year of eligibility. It will ask if you want employees to wait until the entire 12 months of the year is satisfied or make them eligible upon completion of the 1000 hours.

I would never intentionally choose the latter.

Just because it's legal doesn't make it sane.

I am surprised that no one asked the author of the original question what the plan says are the ENTRY DATES.  Whenever explaining when someone gets into a plan, I point out there are two rules. The first is meeting the 1000 hours to "become eligible to enter"), but the second is then actually entering the plan based on the defined entry dates.  

Now, I am willing to bet that the quoted eligibility language is NOT from the plan document but from the SPD.  Plan documents are not written with provisions that start with "You will be eligible...".  So, I'm quite confident we don't yet know what the plan document says and all the answers above are not on point.

It is possible that the plan in question actually provides language that is unclear, but we don't know that.  And, we don't know the entry dates.  If the author of the question wants to provide the actual plan language for meeting eligibility and the actual plan language for entry, then I'm going to bet the correct answer will simply reveal itself. 

There is, FWIW, an example given in DOL Regulation 2530.202-2(e)(3) dealing with an obscure provision of that regulation (that I've never seen in a preapproved plan dealing with a computation period that is longer than 12 months, i.e., an "alternative eligibility computation period"), where the DOL indicates that the employer is to wait until the end of the computation period.  Since that portion of that regulation is not dealing directly with the "year of service" as we commonly use that term (i.e., a computation period that is exactly 12 months long), and since it is only an example to begin with, I don't think employers should feel compelled to always use the end of the computation period.  I suspect, though, that the reason why some documents are ambiguous is that many documents first originated during those early days after ERISA and that practitioners have "grown up" with the tradition of waiting until the end of the computation period (perhaps because the DOL suggested that as a possibility in that example).  The principal reason for plan documents never having been clarified is most likely inertia.

Someone above had an example of very good plan language because it contains the magic words "at the end of the eligibility computation period."   Why else is this important?  Because crediting eligibility is often different than crediting vesting.  Most practitioners conclude (correctly, IMHO) that you grant the additional vesting at the point at which the participant is credited with the 1,000th hour.  Why?  Because no matter what happens between that point and the end of the vesting computation period, the participant will get that vesting credit at the end of the computation period.  Especially if there is an immediate distribution because of a termination of employment after the 1,000th hour, the employer is better off just granting the vesting credit upon the 1,000th hour so that the entire vested account balance can be then distributed with no make-up distribution at year-end because the employer waited until the end of the vesting computation period to grant the additional vesting.

In the context of eligibility, I think most employers want both the 12-month wait and the 1,000 hour, i.e., the employee doesn't get the year of service credit until the last day of the eligibility computation period so as to prevent employees entering sooner than that.  In that case, it would be better if the document explicitly stated that, so as to distinguish how eligibility is determined as opposed to the 'practical" interpretation of using the 1,000th hour for vesting, regardless of when during the CP the 1,000th hour is credited for vesting.  I don't think anyone goes to jail if they interpret an ambiguous document one way or the other for eligibility (or vesting, for that matter), so long as they do it the same way for everyone for the life of the plan (or until a clarifying amendment).  This assumes the plan gives the fiduciary discretionary authority to interpret any ambiguity.

As someone else pointed out, the problem with the original fact pattern given was that it was confined to the 1,000th hour occurring during the first 12 months without stating what happens after that point, which could well end up being a disqualification defect, not just an ambiguity.  It should have been tied to the plan's eligibility computation period in some way.