Blue Ridge ESOP Associates Industry News

Eligibility, Vesting and Allocation Requirements

Posted by Melanie Ebert

Dec 21, 2022 10:30:00 AM

Eligibility, vesting and allocation requirements can be complicated and are frequently misinterpreted as being intertwined. They can be particularly confusing when there are frequent references to a Year of Service for all three items, however, each of these provisions need to be treated separately.  

The plan document will define how eligibility is determined, how participants will vest in the plan and who qualifies for an allocation. While each of these topics could be discussed at length separately, let’s look at an example of common plan provisions and unwind each item.

(Plan provision assumptions have been used. Plan document provisions vary and are plan specific. Please refer to your plan document and review with your Blue Ridge administrator as needed.)

Eligibility Screenshot #1a

Let’s review a few plan years using a participant that was hired in July of 2021. He worked for the company for just over 3 years and terminated in October of 2024.   Since he had hours and compensation for 2021, 2022, 2023 and 2024, he was reflected in 4 plan year reports. Below is a summary of his census information for each plan year.

Eligibility Screenshot #2

For initial eligibility into the plan, since he was hired on July 15, 2021 and he had over 1,000 hours from July 15, 2021 through July 14, 2022, he entered the plan as a participant on the next entry date of January 1, 2023. 

For vesting, we look at hours information for each plan year census information is provided. Since he had 1,000 hours of service in 2021, 2022, 2023 and 2024, he received a year of vested service for each of those 4 plan years. 

In reviewing if he qualifies for an allocation each year, he is not eligible for an allocation for 2021 and 2022 since he did not yet become a participant in the plan (even though he had 1,000 hours for each of those plan years). His entry date was not until January 1, 2023. He does qualify for an allocation for 2023 since he was a participant, he had over 1,000 hours of service in 2023 and he was employed on the last day of the plan year. For 2024, he is listed as not qualifying for an allocation since he was not employed on the last day of the plan year even though he worked over 1,000 hours (he did not have an exception due to death, disability or retirement). 

Part of the year end process Blue Ridge ESOP Associates ("Blue Ridge") will provide will be to determine eligibility, vesting and those that qualify for the allocation for the plan year. Blue Ridge will provide a census verification report to provide you the opportunity to review the determinations that been made (see example). The report will detail entry dates (date of participation), years of service (for vesting purposes), if participants qualify for the allocation for the year (Yes or No indicators in the Cont. column) and will detail the eligible compensation that will be used if they qualify for the allocation. Below is an example for the 2021 plan year.  

Eligibility Screenshot

Please be sure to review eligibility, vesting and allocation qualifications carefully for all employees. Various plan provision options exist. Please refer to your plan document and review with your Blue Ridge administrator as needed. We’re always willing to help shed light on these perplexing plan provision differences.

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Blue Ridge ESOP Associates can provide everything you need to administer your ESOP, 401(k) or combination ESOP/401(k) plan. Our full service outsourcing, which can include participant on-line services, provides worry-free  assistance for your HR or Benefits staff, leaving them free to concentrate on other responsibilities.

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