Don’t Make These “Rookie Mistakes” When Calculating Service!
Calculating years of service in a retirement plan can be a difficult proposition, not only because the rules are tricky, but also because plan sponsors have options under the rules; therefore, what may be true for one plan is false for another. While I will save a review of all the rules for a long-form article (with emphasis on long), I wanted to devote this week’s Top of Mind to some “Rookie Mistakes” that we commonly see from those who are just learning the rules of calculating years of service (and even some who may be more experienced).
The top three “Rookie Mistakes” in calculating service are:
- Failing to understand the concept of “once in, always in”— With limited exceptions, once an individual becomes eligible to receive employer contributions to their retirement plan, he/she is generally “always in” the plan. This means the individual will always be eligible to receive employer contributions regardless of hours worked, unless their employment is terminated or they move to an ineligible class. In the case of rehires, if the participant was eligible prior to leaving, regardless of the length of the break in service, they would be eligible upon return. Hired 10, 20, even 30 years later? The participant would be placed back in the plan immediately upon rehire, as long as they satisfied the plan’s service requirement prior to leaving.
- Confusing “break in service” with “termination of employment” — A break in service is when an employee is credited with 500 hours or less (three months or less in elapsed-time plans) of service during an eligibility computation period (see below). A termination of employment is NOT required in order for a break in service to occur (a reduction in hours will often do the trick). Conversely, a termination of employment will not always result in a break in service, particularly if the employee is rehired shortly after terminating employment.
- Using the wrong eligibility computation period to calculate years of service/breaks in service — With some exceptions, the anniversary year (i.e., the 12-month period following the employee’s date of hire) is used as the eligibility computation period for calculating the initial year of service or a break in service. However, after that, it can get tricky, as a plan that counts hours may elect to use either the anniversary year or the plan year that includes the employee’s anniversary date. This means that one plan may differ from another with respect to eligibility computation period. Therefore, it is always important to read the specific plan provisions when calculating service.
By skillfully navigating these common trouble spots, plan sponsors can avoid being a “Rookie” when it comes to service calculations!
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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