Handling Rehired Employees

Employees come and go — and sometimes come back. But are they eligible to enter the plan upon their rehire date? A recent ASPPA webcast addressed the legal requirements as well as optional plan design provisions that affect the handling of rehired employees.

In “Rehires,” a Sept. 25 ASPPA webcast, American Retirement Association Retirement Education Counsel Robert Richter addressed administrative issues surrounding breaks in service and determining entry dates, such as eligibility rules, break-in-service rules, the one-year-hold rule and forfeiture/buyback rights.

All service with an employer counts toward eligibility of rehired employees, but with some limited exceptions, Richter noted. And under the Uniformed Services Employment and Reemployment Act (USERRA), upon reemployment, all service in the military counts as well.

While all service counts toward rehired employees’ eligibility toward participation in the retirement plan, a plan can require that an employee complete two years of service without an intervening break in service, Richter noted. A plan also can require that an individual be employed on the entry date — the date on which one can join the plan — in order for a rehired employee to rejoin the plan. If an employee comes back after entry date, he explained, the rehired employee generally must enter the plan on the day of return — unless break in service rules allow the employer to disregard previous service.

For example:

Employee A is hired on May 1, 2017. The employee quits on April 1, 2018 with 1,800 hours of service. The employee would have had a year of service on April 30, 2018. The entry dates for the plan are the first day of the first and seventh months following the date of rehire. If the employee is rehired before July 1, 2018 then he or she enters the plan on July 1, 2018. If he or she is rehired after that date, they enter the plan on the date of rehire, unless break in service rules apply.

A year of service is defined as a 12-month computation period in which an employee has at least 1,000 hours of service, Richter said. There is no requirement that an employee be employed on a particular day. It is possible to have year of service even if one is not employed at beginning or end of a computation period; there is no requirement that an employee work for 12 months.

How a plan credits an employee for a year of service also can affect when that employee can reenter the plan. For example:

A plan has entry dates of Jan. 1 and July 1; an employee can enter on one of those dates, or if the employee has not fulfilled the year of service requirement year of service, he or she enters on the next of those entry dates following the date when the year or service requirement is satisfied.

Employee A is hired Jan. 2, 2014. If the employer credits A with a year of service on Jan. 1, 2015, A may enter on Jan. 1, 2015, If the employer credits A with a year of service on Jan. 2, 2015, A cannot enter the plan until July 1, 2015.

Hours of service are a relevant measure as well. Richter identified two ways to count them: counting actual hours of using an equivalent method.

Richter identified equivalent measures relevant to determining service:

Working hours: Disregard nonperformance hours; 870 working hours = one YOS

Regular hours: Disregard nonperformance and overtime; 750 regular hours = one YOS

Earnings method: Divide compensation by lowest hourly pay rate

Employment Period Method:

• 1 day = 10 HOS
• 1 week = 45 HOS
• ½ month = 95 HOS
• 1 month = 190 HOS
• 1 shift = entire length of shift

Eligibility computation period: 12-month period used to determine whether an employee has years of service for purposes of eligibility; first such period always starts with the date of hire and ends 12 months later. The second ECP is only relevant if employee doesn’t complete a year of service in the first ECP or if plan requires two years of service for eligibility.

Elapsed Time Method:

• Based on the time that elapses while the employee is employed.
• The period of service starts on the date of hire and ends on the date of severance of service, which is the earlier of the date of severance or one year after a leave of absence.
• The period of severance starts on the date of severance of service and ends when an employee returns to service.
• Under the service spanning rule, if an employee returns to work within one year, then the employee must be credited with that year.
• The one-year period of service for eligibility is the anniversary of the employment date; fractional years count, and 30 days equals one month or can use 365 days.
• Break in Service (BIS) = a period of severance that isn’t counted as a period of service.

Breaks in Service

A BIS is a computation period during which an individual completes less than 501 hours of service. BIS rules, Richter said, are the only way to disregard service. “All service counts,” he said, and added that service must be counted before the plan is established and before the participant even enters the plan.

The rule of parity is one of the ways Richter identified as a means to disregard prior service; it can be followed if an employee was a participant at time of termination, was non-vested, incurs consecutive BIS at least equal to greater of five years or the years of service before the BIS.

The rule of parity can still apply even if an employee did not participate in a plan. Under such circumstances, it can be invoked if an employee:

• worked full time for five years, but the employer did not have a plan;
• quits; or
• is rehired after 10 years.

A key thing to remember is that the BIS rules must be in the plan document in order for them to be applied, Richter noted.

Available on Demand

The ASPPA webcast “Rehires” is available on demand. Click here.