Background

We are a large 401(k) plan sponsor with over 1,000 participants in our plan. With the size of our company, as you can imagine we hire back many employees, some within months and others many years later. We are trying to gain a better understanding how eligibility works when we rehire employees.

Question

Do rehires become eligible right away, or do they have to satisfy the plan’s eligibility requirements?

Answer

Great question! The answer is, it depends. Your plan document should have specific provisions that addresses the participation of employees who are rehired. The plan administrator first must determine if the plan imposes any “break in service” rule (more on this below) when an employee is re-employed. If there is no break in service rule, and the employee previously satisfied the eligibility requirements, the employee must re-enter the plan on the date she is rehired. If, however, the employee had not satisfied the eligibility requirements before her termination, she will first have to finish completing those requirements before becoming a participant in the plan.

So what exactly is break in service? We are going to assume the plan uses counting-hours method for eligibility. Under the counting-hours method, an employee incurs a break in service for eligibility purposes if she is credited with 500 or fewer hours of service during an eligibility computation period. The 500-hour rule is a minimum standard. The plan may be more liberal by defining a break in service using a lesser hours of service rule (e.g., 250 hours of service in an eligibility computation period), or by not imposing a break in service rule.

Example 1 – break in service incurred

The plan year is the calendar year. Plan uses 501 hours break in service rule and has 6-month eligibility requirements. Sansa terminates on August 20, 2015. For the 2015 eligibility computation period (i.e., January 1 through December 31, 2015), Sansa has 800 hours of service. Sansa does not have a break in service for 2015. Sansa does not return to employment until March 1, 2017. For the 2016 eligibility computation period (i.e., January 1 through December 31, 2016), Sansa had zero hours of service and incurred a break in service for 2016. When Sansa is rehired on March 1, 2017, she has to complete the plan’s 6-month eligibility requirements. Why? If an employee incurs at least one break in service, which Sansa did, the plan can temporarily disregard the employee’s prior service. In this case, the plan does impose a break in service and previous services has to be disregard and employee has to meet eligibility conditions all over again.

Example 2 – no break in service

What if Sansa is hired in December 2017? In that case, she will become eligible immediately. Why? She did not incur a break in service in 2017 (she completed more than 500 hours).