Employee Service Crediting: a Key Part of Plan Administration
By Anna Noble, CIP, QPA
Is employee service crediting important?
Yes. Crediting an employee’s service with the employer is one of many important aspects of qualified retirement plan administration, as service with the employer is taken into account for purposes of
meeting eligibility requirements to participate in the plan,
meeting conditions for receiving employer contributions, and
accruing vesting.
Are there certain methods of crediting service?
Yes. For plan purposes, employee service may be credited in three ways.
Actual hours of service method – employees receive credit for the hours during which they performed services for the employer, as well as certain hours for which they were paid, but no services were performed (e.g., paid time off, sick pay, maternity or paternity leave).
Equivalency method – employees receive credit for a defined number of hours based on working at least one hour during a specified period. For example, under monthly equivalency, an employee would receive 190 hours of service for each month he worked at least one hour.
Elapsed time method – The employer does not keep track of hours worked. Instead, the employer considers a period of employee service.
The method of crediting service must be specified in the plan document. The employer may use different methods for different purposes.
Which method of crediting service should be elected?
The answer to this question depends on several factors. The actual hours method requires tracking the hours of service for each employee and may not be fitting for employees paid on a salary basis. On the other hand, while the elapsed time or equivalency method may credit more service than actually performed, it may be easier to administer. The employer should carefully consider the administrative aspect before determining which service crediting method to use.
Can service with an employer ever be excluded for plan purposes?
In general, all service with the employer must be counted for plan purposes. When the plan is first established, current employees may already have completed the minimum number of hours required to participate in the plan. Employee service while in an excluded class must also be counted and credited when an employee moves to a classification eligible for participation in the plan.
For vesting purposes only, the employer may exclude service before the employee reaches age 18, before the plan or the predecessor plan was established, or during the time period that the employee did not make mandatory nondeductible contributions to the plan.
Can service with another employer be granted for plan purposes?
Yes, the employer may, if specified in the plan document, grant service performed with a prior employer. Important to note is that service with any related employer will always be credited for plan purposes without a need for a special plan document provision.
