Age and Service Waivers vs. Predecessor Service
By Sheila Pawlicki, MBA
How can employers help level the playing field and enhance employee eligibility after an acquisition or merger with regards to a qualified plan’s age and service requirements?
When determining if an employee has met a qualified plan’s minimum age and service requirements, many employers first verify the employee’s age and whether the employee has met the service requirement by counting the actual hours worked or by using the hours equivalency or elapsed time methods for determining service.
But there are other ways that an employee may meet the age and service requirements. For example, the current employer could waive the minimum age and service requirements or allow service with a predecessor employer to count towards satisfying the plan’s service requirements.
These options can help employers treat acquired employees and current employees more equitably if that is a plan objective.
What are Minimum Age and Service Waivers?
These are adoption agreement provisions that allow employers to identify whether minimum age and service eligibility requirements will be waived for all employees or for classes of employees as of a specific date. When adopting a new plan, an employer could choose to waive minimum age and service requirements as of the plan’s effective date.
Minimum age and service waivers may apply to all employees, whether part time or full time. The only requirement is that the individual must be employed as of a specific date.
If a waiver applies only to certain employees, such as a class of employees, it may create issues with the general nondiscrimination and coverage requirements under Internal Revenue Code Sections 401(a)(4) and 410(b).
Minimum age and service waivers will apply to applicable contributions elected in the adoption agreement. These waivers do not create an automatic entry date. They merely assist employees with meeting service requirements in order to become eligible to participate in the plan. Once all eligibility requirements have been met, the employee may enter the plan on the next plan entry date.
What is Predecessor Service?
When one company acquires another, the successor employer may recognize service from a predecessor employer for retirement plan purposes. A predecessor employer is the entity that previously employed the employees before the current company.
If the successor employer maintains the prior employer’s plan, any service and vesting credits earned with the prior employer must be counted for eligibility and vesting purposes. An employer is treated as maintaining a prior employer’s plan if it formally adopts the plan or if the prior plan is merged into the current employers’ plan. Generally, this is through a stock acquisition or an asset acquisition in which the buyer assumes the seller’s plan, in which service is continuous and participants would retain their original hire date and would automatically receive credit for the prior employer’s service. If this is the case, no adoption agreement provision amendments are necessary.
If the current employer does not maintain the predecessor plan, the decision to credit service with the predecessor employer is optional. The adoption agreement must be amended to specify the prior employer for which service is credited with the current adopting employer. Generally, this is through an asset acquisition in which the acquired employees appear as new employees of the sponsoring employer.
How Can These Concepts Help Level the Playing Field?
Minimum age and service waivers are generally most equitable if the acquiring employer has no current employees waiting to meet age and service requirements. Otherwise, it would be possible for acquired employees to enter the plan before current employees.
Predecessor service allows employers to recalibrate back to an employee’s original hire date for calculating service, allocation conditions, and vesting. This avoids having to treat acquired employees as new employees that still need to meet the current employer’s service requirements. Crediting predecessor service treats acquired employees and current employees equitably.
Whether an employer is adopting a new qualified plan, or is taking over an existing plan, it’s important to discuss all available options with a competent tax professional.
