Transcript Blue screen - American Society of Pension Professionals

Didn‘t You Used to Work Here?
Dealing with Rehired Employees
Presented by:
Charles Lockwood, J.D., LL.M.
www.asc-net.com
[email protected]
Rehired Employees
 Service crediting – eligibility / vesting


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Related Employers
Predecessor Employers
Multiple Employer Plans
 Break in Service rules
 Forfeitures
 Plan distributions
 HEART/USERRA
Eligibility Requirements
 All service with ER counts



Once service is earned = cannot be lost except
under Break in Service rules
Upon rehire = need to determine whether employee
satisfied eligibility conditions prior to termination
Different results apply depending on whether
employee satisfied eligibility prior to termination
 Age 21 / One year of service
 Number of months (e.g., 6 months)
 2-year eligibility with 100% vesting

Not available for deferrals under a 401(k) plan
Eligibility Computation Period
 12-month period beginning with date of hire
 Subsequent eligibility computation periods
can be based on anniversary of date of hire or
shift to Plan Year

If shifts to Plan Year = always shift “backwards”
 No requirement to be employed on a
particular day within ECP


Must count all service within ECP
Different answer if using elapsed time = no ECP
 May have to recalculate ECP if EE suffers BIS
Entry Dates
 EE enters plan on appropriate entry date after
satisfaction of eligibility conditions
 Entry date may not be later than earlier of:
 6 months following satisfaction of eligibility
conditions
 first day of next plan year
 Most common entry dates -- semi-annual
(January 1 / July 1 for calendar year plan)
 Plan may require employment on entry date
Eligibility Basics
 Wayne is hired by GBA on March 15, 2013
a)What is Wayne’s initial ECP?
3/15/13 – 3/14/14
b) If Wayne does not complete 1,000 HOS
during first ECP, what period should plan
use to measure subsequent ECPs (under
anniversary year method)?
3/15/14 – 3/14/15
c) What is subsequent ECP (under shifting
method)?
1/1/14 – 12/31/14
Eligibility Requirements
 Wayne is hired by GBA on March 15, 2013. He
completes 1,000 HOS on October 24, 2013.
a) When does Wayne enter the Plan (assuming semiannual entry dates)?
3/15/13
10/24/13
1,000 hours
3/14/14
July 1, 2014
b) What if Wayne terminates on 11/25/13 - does he
earn a YOS for eligibility?
Eligibility Requirements
 Wayne is hired by GBA on March 15, 2013.
Wayne quits on November 25, 2013 (after
completing 1,000 HOS).
a) Does Wayne earn a YOS for eligibility purposes? If
so, when does he enter the Plan?
3/15/13
10/24/13
1,000 hours
11/25/13
3/14/14
quits
b) What if Wayne is rehired on 2/24/16. When does he
enter the plan?
c) What if Wayne is rehired on 5/1/14?
Rehired Employees
 Generally will participate on date of rehire =
if satisfied minimum age and service
conditions prior to termination

Cannot hold out until next entry date = unless
rehired before original entry date
 Do not have to let EE in prior to date would have
participated if remained employed
 May be able to exclude service under break in
service rules
Special Problems with Rehires
 If EE did not satisfy eligibility before
termination – what is ECP upon rehire?

Suppose Wayne quit on 5/15/13 after completing
550 HOS. Wayne is rehired on 11/25/13. What is
Wayne’s ECP upon rehire (using shifting ECP)?
3/15/13
5/15/13
quits

11/25/13
3/14/14
rehired
What if Wayne was rehired full-time on 7/15/14?
 7/15/14?
 7/1/15?
1/1/15?
1/1/16?
Special Problems with Rehires
 If EE did not satisfy eligibility before
termination – what is ECP upon rehire?

Suppose Wayne quit on 5/15/13 after completing
550 HOS. Wayne is rehired on 11/25/13. What is
Wayne’s ECP upon rehire (using shifting ECP)?
3/15/13
5/15/13
quits

11/25/13
3/14/14
rehired
What if Wayne was rehired full-time on 7/15/14?
 ECP continues to be calculated based on shifting plan
year (1/1/14 – 12/31/14)
 Wayne would enter plan on 1/1/15 (if earns 1,000 HOS)
Special Problems with Rehires
 If EE did not satisfy eligibility before
termination – what is ECP upon rehire?

Suppose Wayne quit on 5/15/13 after completing
550 HOS. Wayne is rehired on 11/25/13. What is
Wayne’s ECP upon rehire (using shifting ECP)?
3/15/13
5/15/13
quits

11/25/13
3/14/14
rehired
What if Wayne was rehired full-time on 7/15/18?
 DOL Regulations state that for purposes of applying
BIS rules = use reemployment commencement date
 Does same rule apply for eligibility?
Failure to Cover EEs
 Must bring EEs into plan and provide QNEC for
affected EEs, plus earnings



For elective deferrals = 50% of EE’s missed deferrals
based on ADP of same group
Must provide match as if deferred entire amount
Must provide entire ER contribution
 Special rule for brief period of exclusion


EE must be provided opportunity to defer for the last
9 months of plan year
ER must still make up for any missed matching
contributions
Special Problems with Rehires
 Eligibility provisions may have changed since
EE terminated employment

Suppose Wayne was participant under GBA plan
based on 6 months/1 HOS eligibility. Wayne worked
for GBA for 3 years and participated in plan but
never completed 1,000 HOS in any year. After
Wayne terminated, plan was amended to 1 YOS
eligibility. Wayne is rehired on 8/15/14. When will
Wayne participate?
 No anti-cutback issue – can retroactively remove
participants from plan
 If no grandfather provisions – can hold Wayne out until
re-satisfies eligibility
Special Problems with Rehires
 Often can have difficulties determining
whether an EE is a rehire
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Seasonal EEs / layoffs
EEs are kept on payroll records for insurance
purposes
No records – especially for long absences
 Does EE need to enter into new Salary
Deferral election?
Special Problems with Rehires
 Also may need to restore service if EE worked
for controlled group or predecessor ER

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
Joe is hired on 6/14/2014 by ABC Company. Joe had
formally worked for XYZ Company, a related ER. XYZ
did not maintain a plan. When does Joe participate
under ABC plan?
Sally was employed with Jones & Smith, Inc. until
2012. In 2014, ABC purchased the assets of Jones &
Smith and took over the J&S plan. Sally is hired by
ABC Company on 7/5/15. When does Sally
participate under the ABC plan?
Bill worked for XYZ Company, a member of an
Employer within the XYZ multiple ER plan.
Automatic Contribution Plans
 Susan begins making automatic deferrals on
1/1/2012. Susan terminates in August, 2012.
Susan is rehired on 2/12/2014.


When is Susan eligible to participate in the Plan?
If Susan does not elect to defer – should automatic
deferrals commence under the Plan?
 When must automatic deferrals commence?
 Would answer change if Susan had made specific
election to defer (or to not defer) in 2012?


May Susan make permissible withdrawals if deferrals
restart 2/12/2014
How should plan apply any automatic increases to
rehired employees?
Break in Service Rules
 BIS occurs if EE is credited with less than
501 HOS during an ECP or VCP
 3 different BIS rules
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One-Year Holdout Rule
Two-Year Break in Service Rule
Rule of Parity
 Forfeiture Break in Service

Applies only for vesting/forfeiture
Break in Service Rules
 “One-year holdout” break in service rule

“Temporary” disregard of service

Disregarded service must be restored retroactively if
EE completes YOS following BIS
 Restoration only required back to beginning of ECP in
which EE earns YOS

YOS determined based on ECP as if EE is new EE

Retroactive crediting of service can cause
administrative problems
 Can limit problems by using 1,000 HOS requirement
 Can still have problems if plan is top-heavy
Break in Service Rules
 “Two-year” break in service rule

Only applies if plan is using 2 YOS eligibility condition

Plan can require completion of 2 YOS without
intervening BIS

If EE has BIS before completing 2 YOS = treated as
new EE as of reemployment commencement date
Break in Service Rules
 Rule of parity = EE must be totally
non-vested

Permanent disregard of service = treated as new EE

Participant must incur 5 consecutive breaks in
service (or the participant’s YOS, if greater)

If vested in any contribution source (including
deferrals) = rule of parity does not apply
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Unclear questions
 What if EE quit before plan adopted?
 What if EE never made deferrals
IRS Q&A
 Does rule of parity permit disregarding of
YOS for rehired EE who was nonvested at
termination in ER contributions but had
salary deferrals? What about someone who
made no deferrals but could have?

If there is a vested amount, prior service cannot be
disregarded, even if the vested account is
attributable to deferrals

However, if there is a vested percentage, but no
vested amount (i.e., no deferrals), rule of parity
does permit prior service to be disregarded
Forfeitures
 Forfeiture events = termination of
employment is not forfeiture event
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Five-year forfeiture break in service
Cash-out distribution
 Forfeiture break in service
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Must have 5 consecutive BIS
Post-break service is ignored for pre-break accruals
Permits permanent forfeiture of nonvested account
balance = may require separate accounting if EE is
rehired
Example
 Don terminates with $20,000 A/B and 60%
vesting. Don does not take a distribution.
After 6 years, Don is rehired. What is Don’s
vested A/B (assuming A/B grew to $24,000
at time of forfeiture) and no gains thereafter?



Once Don incurs 5 BIS, his $9,600 nonvested
account balance [40% x $24,000] is forfeited
When Don is rehired, he is 100% vested
in remaining $14,400 [60% x $24,000]
If Don receives additional contribution = will
continue to vest in such amounts
 Must maintain separate accounts
Cash-Out Distribution
 Accelerates recognition of forfeiture

Immediate forfeiture upon cash-out
 EE must consent if vested A/B exceeds $5,000
 EE must be allowed to “buy back” forfeited
benefit if rehired prior to forfeiture BIS

Buy-back/restoration does not include earnings
 Vesting not affected if repay nonvested amount


May repay 5 years after reemployment
Basis will not have to be maintained if comes from
pre-tax source (e.g., IRA)
 Deemed cash-outs
In-Service Distribution
 If terminated EE took a distribution upon
termination but is rehired before distribution
is processed = can plan proceed with
distribution?
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
Under PLR 201147038 = IRS held that prearranged
termination and rehire cannot be used to justify
distribution upon termination of employment
For bona fide termination, IRS informally has stated
that if distribution has not been completed when EE
is rehired = distribution should not be completed
 Does this cause a 411(d)(6) cutback?

What if EE began distribution in installments/annuity?
USERRA
 Applies to all ERISA plans and government
plans = includes all defined benefit, defined
contribution and 401(k) plans
 Service crediting under qualified plans
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No break-in-service due to military leave
Upon reemployment, period of military service
deemed service with employer for eligibility, vesting
and accrual purposes
Military leave includes any period of time recovering
from illness or injury incurred as result of military
service (generally up to two years)
USERRA
 ER must make “make-up contribution” based
on compensation EE would have earned had
EE remained employed during military leave

Make-up contributions are subject to any plan limits
and limits under 415 and 404 for year for which
contribution is made

ER contributions must be made within 90 days of
reemployment (or as soon as practicable)
 EE is not entitled to earnings or forfeitures
for period while on military leave
USERRA
 Employee may “make-up” missed deferrals
at any time during period that is earlier of:

3 times the period of military service, or

5 years
 Elective deferrals can only be made out of
compensation from ER
 Employee must receive any related match
USERRA
 EE can designate for which year deferrals are
made

ER should have procedures in place for USERRAcovered EEs to designate amount of “make-up”
deferrals and period to which deferral relates
 Make-up deferrals are subject to plan limits
for year to which make-up relates

Make-up deferrals not subject to ADP testing
 Plan may suspend loan payments
during military leave (should be addressed in
loan policy)