“I read with great interest your Ask the Experts column that discusses the transition of a union employee to a nonunion employee in a 403(b) plan where union employees were not eligible for employer contributions. In that article, it stated that the employee’s service as a union employee would still count for waiting period purposes. As such, the employee would have immediately entered the plan once the employee became a nonunion employee, since the employee had already met the service requirement with service performed while a union employee, which could NOT be excluded.
“But would service performed as an employee that could be statutorily ineligible count for eligibility and/or vesting purposes under the plan? For example, in our 403(b) plan, under the universal availability rules, we exclude students performing services described in Code section 3121(b)(10), since we have university students performing services for our university. Does that service count for eligibility and vesting purposes if we later hire such students as retirement plan eligible employees, assuming break-in-service rules wouldn’t wipe it out?”
Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:
The answer is, in general, yes. The types of service that can be excluded for eligibility and vesting purposes is quite limited. For example, here is Code section 411(a)(4), which lists the categories of service that can be excluded for vesting purposes:
(4)Service included in determination of nonforfeitable percentage:
In computing the period of service under the plan for purposes of determining the nonforfeitable percentage under paragraph (2), all of an employee’s years of service with the employer or employers maintaining the plan shall be taken into account, except that the following may be disregarded:
(A)years of service before age 18;
(B)years of service during a period for which the employee declined to contribute to a plan requiring employee contributions;
(C)years of service with an employer during any period for which the employer did not maintain the plan or a predecessor plan (as defined under regulations prescribed by the Secretary);
(D)service not required to be taken into account under paragraph (6);
(E)years of service before January 1, 1971, unless the employee has had at least 3 years of service after December 31, 1970;
(F)years of service before the first plan year to which this section applies, if such service would have been disregarded under the rules of the plan with regard to breaks in service as in effect on the applicable date; and
(G)in the case of a multiemployer plan, years of service—
Thus, in general, unless the student’s service was prior to the student turning 18 years of age, it would be included for vesting purposes. As for the plan’s waiting period for eligibility, the types of service that can be excluded are even more restrictive, and also would not include service performed while a student at a university, as in your question. Thus, your operating systems should have the ability to track such types of service for both eligibility and vesting purposes in case such students eventually become employees. Fortunately, if your plan counts hours, most students would not have performed enough hours of service to meet the 1,000-hour requirement for inclusion as a year of service. Of course, this assumes that the 403(b) plan in question is subject to the vesting and eligibility requirements of ERISA, as well as the nondiscrimination rules under Code section 403(b)(12).
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.
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