Employee Breaks-in-Eligibility Service Are Inevitable. Here's How to Handle Them.
By Kristoffer Aas, QKA, EdM
In a prior article, we addressed retirement plan eligibility service requirements and crediting methods to determine whether an employee has met the plan’s service requirements. Just as important for an employer choosing plan service requirements is considering when an employee will experience a break in eligibility service. Breaks in service—leaving that employer, in other words—can potentially delay when an employee becomes a participant, or resumes participation if she was an eligible participant before incurring breaks in service.
By electing the plan’s service crediting method for eligibility, the employer has simultaneously decided how an employee will incur a break-in-service. Then, whether the employee was a participant before the break and whether the plan requires additional service criteria to be met, decides when participation continues following the break.
How does each service crediting method affect how an employee will incur a break-in-eligibility service?
If the employer elects either the actual hours of service method or the equivalency hours of service method, the employee must complete more than 500 hours of service (or, if elected, a lesser number specified in the Adoption Agreement) during one year of eligibility service to avoid a break. If the employer elects the elapsed time service method, the participant will incur a break if there is a severance of 12 consecutive months or more.
What if the employee was not a participant before the break-in-eligibility service?
If the employee was not a participant before the break in eligibility service, the service earned before the break is not counted towards eligibility determinations made after the break. In other words, the rehired employee is treated as a new employee as of the date they return to employment. The same applies if an employee earned only one year of service before the break if a plan requires two years of service for eligibility.
What if the employee was a participant before the break-in-eligibility service?
If the employee was a participant before the break in eligibility service, all service before the break is counted towards any eligibility determinations after the break. Generally, this means a participant does not have to resatisfy the eligibility requirements regardless of the length of the break, unless the plan has elected the rehire holdout rule. If an active participant experiences a break in eligibility service, the plan document will decide whether she can continue to participate. If a separated participant experiences a break-in-eligibility service, the plan document will determine if he can participate immediately as of his rehire date or if he must wait until the next plan entry date.
What if the plan has a rehire holdout rule?
If the plan has a rehire holdout rule, the participant must resatisfy the plan’s eligibility requirements starting on the rehire date (the first day she worked an hour of service after returning) before being credited with her pre-break service. When satisfied, the participant is also retroactively eligible for any employer contributions given since her rehire date. This does NOT apply to elective deferrals or ADP safe harbor contributions.
What if the employee is absent because of maternity or paternity leave?
If employees are absent because of maternity or paternity leave, regardless of the service crediting method elected, they are exempt from the break-in-eligibility service rules and will be credited for their time away. The plan document will determine the maternity or paternity leave conditions.
What if a participant transfers to or from an ineligible class of employees?
If a participant who has not incurred a break in eligibility service transfers to an ineligible class of employees, she is immediately eligible to participate upon her return to an eligible class of employees. If a participant who incurred a break in eligibility service transfers to an ineligible class of employees, the above rules will decide when the participant can continue participation in the plan upon returning to an eligible class of employees.
What if, on the Ascensus document, an employee is rehired after plan establishment?
If a former employee is rehired after the employer has established its plan, a break-in-eligibility service between the date of termination and date of rehire determines whether he is treated as a new or former employee.
If he incurred a break, his prior service does not count so he is treated as a new employee.
If he did not incur a break, his prior service does count so he is treated as a former employee.
NOTE: For plans using other document providers, see their plan document to determine which service counts for which purpose.
