Ask the Expert – Employees Who Work Less than 1000 Hours/Year

April 28, 2009 (PLANSPONSOR (b)lines) - A plan provider asks: "If an employee who usually falls under the 'works less than 20 hours a week' exemption from eligibility in a 403(b) plan works more than 1000 hours in one year, must the employee be offered eligibility even if he/she most likely will drop below 1000 hours again? In other words, can an employee fall in and out of this class? Or is he/she considered, 'once in, always in?'"

Sponsors must remember that if the 403(b) is an ERISA plan, the sponsor cannot simply rely on the IRS’s exemption that an employee is exempt from eligibility if the sponsor expects that the employee will work less than 1000 hours in the year because ERISA requires the actual counting of hours. The employee must be included in the plan each year he or she actually works 1000 hours or more, and could fall in and out of eligibility.

For non-ERISA plans, employees can be excluded based on the expectation of working less than 1000 hours. However, technically the employee should be a participant in any year he or she actually does work 1000 hours or more, so sponsors run the risk of having an operational failure if audited and an excluded employee is found to have worked enough hours in a given year to be eligible.

Rather than deal with the administrative headache of actually counting hours and having an employee fall in and out of eligibility, if there is any doubt an employee will go over the 1000 hours requirement, the plan sponsor is better off including him or her and sending an eligibility notice.

NOTE: This feature is to provide general information only, does not constitute legal advice as part of an attorney-client relationship, and cannot be used or substituted for legal or tax advice.

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Please contact the PLANSPONSOR Reprint Manager, Michelle Judkins.