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(b)lines Ask the Experts – Differing ‘Year of Service’ Definitions for Different Plan Provisions

Our recordkeeper for our Employee Retirement Income Security Act (ERISA) 403(b) plan recently informed me that our plan document year of service definition is different for satisfying our one-year waiting period to receive employer contributions than it is for vesting purposes.

By PS | April 25, 2017
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“Why are the definitions different? Would it not make more sense for the definitions to be the same, thus making the provisions easier to administer?” 

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer: 

Good question, and good to see that you and your recordkeeper are staying on top of such an important provision as to what constitutes a year of service for initial eligibility and vesting. Though the rules regarding service crediting for eligibility and vesting are similar, it is indeed quite possible for a plan to credit service in one fashion for initial eligibility to participate and in a different fashion for vesting purposes. There could be any number of reasons for a plan using different requirements—the employer’s choice of eligibility and vesting service crediting rules ultimately depends on what the employer is trying to accomplish and what its administrative reporting abilities are. 

As you might recall, for an ERISA 403(b) plan with a vesting schedule, ERISA section 202(a) limits the maximum eligibility requirement to one year of service, which is a 12-month period during which the employee completes at least 1,000 hours of service. The initial 12-month period begins with the first hour of service, and thereafter may switch to the plan year. Alternatively, the eligibility requirement may be measured by a continuous period of employment (i.e., elapsed time), such as 12 months beginning with date of hire, or six months, etc. For vesting service, 403(b) plans must satisfy the provisions of Code Section 411. Similar to the ERISA 202(a) definition, a year of service for vesting purposes is defined in Code Section 411 as a 12-month period during which an employee must complete at least 1,000 hours of service. However, the measurement period can be ANY 12-month period, as long as it applies to all participants. For example, the measurement period may be the plan year, which is typical, but could instead be the 12-month period beginning with the participant’s date of hire (or first hour of service). Alternatively, an employer might choose to measure vesting service by years of employment under the elapsed time method.  

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