But there are a few simple guiding principles to know, according to S. Derrin Watson, Esq., an attorney who works for SunGard in Goleta, California, with their Relius line of educational programs and products. Watson shared five guiding principles for service and eligibility with attendees of the American Society of Pension Professionals & Actuaries 2013 Annual Conference:
- Years of service are forever; once you’ve earned them, they don’t stop counting. Warren reminded attendees that years of service can come from many sources, including the current plan sponsor, related employers, cosponsors of multiple employer plans and predecessor employers.
- Everyone credited with service has an entry date. This is specified in the plan document and is generally the first entry date after or coincident with the date the individual satisfies the plan’s minimum age and service requirement.
- An individual enters the plan on his or her entry date if the individual is an eligible employee on that date.
- A person who becomes an eligible employee after his or her entry date enters the plan immediately.
- Break-in-service rules can change these outcomes, but they are very limited.
Watson explained several scenarios. An employee who satisfies the age and service requirements for eligibility, and enters the plan on their entry date, but terminates and is rehired later, re-enters the plan immediately. The same is true for an employee who meets the requirements but terminates before their entry date and is rehired later. If an employee satisfies the plan’s service requirement, but hasn’t met the minimum age requirement, terminates and is rehired later, can enter immediately if they’ve met the minimum age requirement while not employed by the sponsor, or must wait for the next entry date following or coinciding with meeting the minimum age requirement. Finally, an employee who terminates before he or she meets the minimum service requirement and is rehired later, must wait to enter the plan on the entry date following satisfaction of the service requirement.
Break-in-service rules can throw a glitch in rehire administration; they allow plan sponsors to disregard service in some situations. Watson explained three break-in-service rules:
- Plan sponsors that require two years of service for eligibility to enter the plan, can require two years of service following rehire if an employee did not finish their two years of service prior to termination.
- If a terminated employee incurs a one-year break-in-service, the plan sponsors can require them to complete a year of service upon rehire before entering the plan. However, the plan sponsor must use a retroactive entry date for that employee, meaning the employee must be able to retroactively contribute to the plan and get matching contributions. Watson said this rule is only helpful to plan sponsors if the employee comes back as a part-time employee and never gets another year of service in a plan year. “Otherwise it is an administrative headache,” he stated.
- The rule of parity break-in-service rule allows a plan sponsor to treat a rehire as new for purposes of plan eligibility if he or she had the greater of five breaks-in-service or breaks-in-service equal to the years of service prior to termination. This also creates administrative headaches, because if the employee was paid and had part of his or her account forfeited, the employee can buy back the forfeiture if he or she repays the distribution, including deferral amounts. The money must be put back in the source account, but the plan sponsor and recordkeeper must keep up with the different tax basis for that amount.
The Uniformed Services Employment and Reemployment Rights Act (USERRA) can also be an administrative headache for military personnel reemployed after their military service. One day of reemployment is all that is needed for retroactive retirement plan rights, Watson said. They are deemed to have had compensation during their time away; they must be given time to make deferrals for past years, and plan sponsors have to keep up with what money is for which year. They also get match on those deferrals for the respective year, but plan sponsors do not have to credit earnings or reinstate any forfeitures.
The Heroes Earnings Assistance and Relief Tax Act (HEART) adds another bump in administration. Watson explains that HEART provides for employers to pay military members away doing service the difference between their military pay and the pay they would receive if they were still working at their daily job. For retirement plan purposes, the plan sponsor must treat the employees receiving those payments as if they are still employed, and deferring, if they were before. Then, if a service member employee returns to employment, USERRA rules apply for counting full compensation for retroactive contribution purposes.
It is important to understand all the rules that affect rehire administration, because, as Watson said, some present “an opportunity to foul up.”