Using Hours of Service to Calculate Eligibility

“Our recordkeeper is calculating some individuals as having met their service requirement prior to their second anniversary with the firm. How is that possible?”

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

Assuming that your recordkeeper is calculating service correctly in accordance with the terms of the plan, the Experts may be able to point you in the right direction here. As usual, looking at the relevant regulatory guidance is often quite helpful in arriving at an answer. Here are the relevant sections of the Code and ERISA; the boldface text is the Experts emphasis:

Code Section 410(a)(3)

Definition of year of service.—

410(a)(3)(A) General rule.—

For purposes of this subsection, the term “year of service” means a 12-month period during which the employee has not less than 1,000 hours of service. For purposes of this paragraph, computation of any 12-month period shall be made with reference to the date on which the employee’s employment commenced, except that, under regulations prescribed by the Secretary of Labor, such computation may be made by reference to the first day of a plan year in the case of an employee who does not complete 1,000 hours of service during the 12-month period beginning on the date his employment commenced.

ERISA Regulation, §2530.202-2

(a)Initial eligibility computation period.—

For purposes of section 202(a)(1)(A)(ii) of the Act and section 410(a)(1)(A)(ii) of the Code, the initial eligibility computation period the plan must use is the 12-consecutive-month-period beginning on the employment commencement date. An employee’s employment commencement date is the first day for which the employee is entitled to be credited with an hour of service described in §2530.200b-2(a)(1) for an employer maintaining the plan. (For establishment of a reemployment commencement date following a break in service, see §2530.200b-4(b)(1) (iii) and (iv)).

(b)Eligibility computation periods after the initial eligibility computation period.—

In measuring years of service for purposes of eligibility to participate after the initial eligibility computation period, a plan may adopt either of the following alternatives:

(1)

A plan may designate 12-consecutive-month periods beginning on the first anniversary of an employee’s employment commencement date and succeeding anniversaries thereof as the eligibility computation period after the initial eligibility computation period; or

(2)

A plan may designate plan years beginning with the plan year which includes the first anniversary of an employee’s employment commencement date as the eligibility computation period after the initial eligibility computation period (without regard to whether the employee is entitled to be credited with 1000 hours of service during such period), provided that an employee who is credited with 1000 hours of service in both the initial eligibility computation period and the plan year which includes the first anniversary of the employee’s employment commencement date is credited with two years of service for purposes of eligibility to participate.

As you can see, the initial eligibility computation period for the initial year of service in your plan is fairly straightforward—the first 12 months of employment from date of employment to the anniversary of date of employment is used. A participant would be credited with a year of service in your plan during the first eligibility computation period if he/she works at least 1,000 hours during the first twelve months of employment.

It is in the second year (and beyond, in some cases) where things get a bit trickier. After the first twelve months of employment, the plan may elect to continue to utilize the same 12-month period beginning on each anniversary of employment. However for some plans, this can be difficult for their operating systems to handle, since each employee not hired on the same day would have a different eligibility computation period for hours of service and eligibility. Thus, the regulations permit a plan to switch the eligibility computation period, beginning with the plan year that includes the employee’s first anniversary of employment (i.e., the last day of the first 12-month eligibility computation period), so that all employees will eventually have the same timeframe (the plan year) for hours and eligibility calculation. The Experts believe that this option is what may have been elected in your plan; you can confirm by reviewing the eligibility section of your plan document.

Here is an example as to how the plan year election can cause an employee to satisfy a two-year service requirement prior to his/her second anniversary. Let’s say Jane has the following service record for a plan with a calendar-year plan year.

Date of Hire: 4/15/2016

# of hours worked 4/15/2016-4/14/2017: 1,500

# of hours worked 1/1/2017-12/31/2017: 1,600

In a plan that elected a plan year calculation following the initial year of service, Jane would satisfy the two-year service requirement on 12/31/2017, even though her second anniversary will not occur until 4/15/2018.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.