Navigating a Break-in-vesting Service? What You Need to Know About Your Qualified Retirement Plan
By Kristoffer Aas, QKA, EdM
Unlike breaks-in-eligibility service that can delay an employee’s ability to participate in an employer’s retirement plan, breaks-in-vesting service can delay or even prevent a participant’s ability to fully vest and become entitled to employer contributions if she is subject to a vesting schedule. As more members of the modern workforce move from employer to employer during their careers, an understanding of breaks-in-vesting service can help them avoid forfeiting unvested contributions.
How does each service crediting method affect how a participant will incur a break-in-vesting service?
Similar to eligibility service crediting methods, if an employer elects either the actual hours of service method or the equivalency hours of service method, a participant must earn more than 500 hours of service (or, if elected, a lesser number specified in the adoption agreement) during one year of vesting service to avoid a break in vesting service. If an employer elects the elapsed time service method, the participant will incur a break if there is a severance of 12 consecutive months or more.
NOTE: Some documents specify that a break-in-vesting service will only occur if there is a severance of employment, not just a failure to meet an hours/equivalency requirement. See the plan document for more information.
How do breaks in vesting service impact a participant becoming fully vested in employer contributions?
If a participant has fewer than five consecutive one-year breaks in vesting service, then the vesting service accrued after any past breaks will increase the vested percentage of the accruals earned before the breaks.
For example, if participant A terminated employment with a 60 percent vested account balance and was rehired after incurring three consecutive breaks-in-vesting service, his service after the rehire date is used to increase the vested percentage of the accruals earned before terminating employment (starting at 60 percent).
What if a participant incurs five or more consecutive one-year breaks in vesting service?
If a participant incurs five or more consecutive one-year breaks in vesting service, the vesting service earned after the break will not increase the vested percentage of the accruals earned before the break.
So in the previous example, if participant A was rehired after six consecutive breaks-in-vesting service, his service earned after the rehire date could not be used to increase the vested percentage of the accruals earned before terminating employment. Therefore, the accruals earned before the breaks in service would remain constant at 60 percent (but protected by anti-cutback regulations) while the accruals earned after the rehire date would increase in vested status, starting at 60 percent.
Additionally, because participant A’s severance from employment equaled at least five one-year breaks-in-vesting service, the nonvested 40 percent of his account balance was, depending on the plan document, either forfeited upon termination or upon incurring the fifth break-in-vesting service.
NOTE: The plan document will specify whether the prebreak vesting service is used to increase the vested percentage of the postbreak accruals. For example, in the previous scenario, the plan document would dictate whether participant A’s vesting service earned before the break would count toward determining the vested percentage of his accruals earned after the break.
What if the plan has a “one-year break rule”?
If the plan has a one-year break rule (also known as a one-year holdout rule)—applying only to employer contributions—a participant who is not fully vested and incurs at least a one-year break-in-vesting service must earn another year of vesting service before being credited with the vesting service earned before the break.
Are there any exceptions to these rules?
Participants who are absent because of maternity or paternity leave, regardless of the service crediting method elected, are exempt from the break-in-vesting service rules and will be credited for their time away. The plan document will specify the maternity or paternity leave conditions. This also applies to qualified leave under the Family and Medical Leave Act, which is required for employers with 50 or more employees.
The Uniformed Services Employment and Reemployment Rights Act (USERRA) ensures that service members who return to the same employer after qualified military service are not treated as having a break-in-vesting service and are attributed that time towards their vesting service. Similarly, the Heroes Earnings Assistance and Relief Tax Act modified USERRA by extending this benefit to a participant’s survivors in the event of a military-related death, requiring the granting of vesting credit for the period of military service.
What if a participant transfers to or from an ineligible class of employees?
The same vesting rules apply in an ineligible class as in an eligible class of employees. The difference is that the service earned while in the ineligible class is not credited until the participant returns to an eligible class.
