Turnover is inevitable and in some cases, employees are rehired. How do you treat rehired employees? Will the employee automatically participate in the plan? Will their vesting remain the same? What happens if the employee is in payout status? In this article we will look at eligibility, breaks in service, vesting, and other things to keep in mind so when an employee is rehired, you will be able to confidently explain what that means for their account.
Eligibility
Participation of a rehired employee depends on three things:
1. Did the employee previously meet the eligibility requirements of the plan?
2. Did the employee reach the entry date?
3. Did the employee have a Break in Service?
If an employee was a participant in the plan prior to termination, the participant will enter the plan immediately upon their rehire date. (See Example A)
If an employee met all of the requirements to enter the plan, however terminated prior to reaching the plan entry date, the employee will enter the plan on the later of their rehire date or the plan entry date the employee would have entered if they had not terminated employment. (See Example B)
If an employee did not meet the requirements to enter the plan prior to termination, they must first satisfy the eligibility requirements. After satisfying the requirements, they will enter the plan on the next entry date. (See Example C)
Some plans require less than a year of service for eligibility purposes. For example, you may see a month requirement (for example 6 months), or a month and hour requirement (for example 500 hours in 6 months of service). Typically you would count employment for the required number of months even if the employee was not employed continuously during that timeframe. (See Example D)
While the situations described above will cover many of your rehires, some exceptions may occur if your plan has break in service requirements. Below we will look at Breaks in Service and what that means for employees in your plan.
In the examples below, assume the plan has a 1,000 hour and 12 month requirement to enter the plan and the plan’s entry dates are January 1st and July 1st following meeting these requirements. Also assume in these examples the plan does not have any break in service rules.
Example A. John Smith was hired June 1, 2020. He worked 1,000 hours from June 1, 2020 through May 31, 2021. Following meeting the eligibility requirements, John entered the Plan on July 1, 2021. John terminated on August 15, 2021 and was rehired February 1, 2022. Since John was a participant in the plan prior to termination, he would immediately participate in the plan upon his rehire date.
Example B. John Smith was hired June 1, 2020. He worked 1,000 hours from June 1, 2020 – May 31, 2021. He terminated employment on June 30, 2021, prior to reaching his entry date. He was rehired August 15, 2021. Since he previously met the requirements to enter the plan, he would enter the later of his rehire date or the entry date based on his original hire date, which would be August 15, 2021.
Example C. Max Smith was hired June 1, 2020 and terminated December 1, 2020. He worked 500 hours during that timeframe. Since he has not met the 1,000 hour and 12-month requirement, he would first need to meet those requirements before he is eligible to enter the Plan.
Example D. Assume the plan requires an employee to work 500 hours in 6 months and then would enter the following January 1st or July 1st.
Jasmine Smith was hired June 1, 2020. She terminated employment August 15, 2020. She was rehired November 1, 2020. From June 1, 2020 through December 31, 2020, she worked 600 hours. Regardless of the fact she was not employed during the full 6-month period from June 1, 2020 through December 31, 2020 we will still count her continuous employment through that time period. Since she worked over 500 hours during that time frame, she will enter the plan on January 1, 2021.
Breaks in Service
For eligibility purposes, you must include all employee’s service to determine an employee’s ability to participate in the plan unless the plan includes break in service rules limiting this requirement This would include service prior to the plan being established.
There are two common break in service rules:
1. One-year break in service (one-year hold out)
2. Rule of Parity
Break in service is defined using an hours method or an elapsed time method. Under the hours method, a break in service is defined as a 12-month period an employee works less than 501 hours. To determine a break in service, you would look at the same time period you use to determine eligibility in the plan. If your plan first looks at an employee’s anniversary period and then reverts to the plan year, your determination of a break in service would also revert to calculating based on the plan year. The elapsed time method defines a break in service as a period of severance of at least 12 months.
One-Year break in service: If an employee incurs a one-year break in service, you may disregard their prior service until the employee once again complete a year of service. Once that occurs, the employee may participate retroactively back to their rehire date or entry date, if later. Administratively, the one-year hold-out rule makes little sense since most cases you are retroactively updating their service. The only people it would not require updates would be part-time employees or those who re-terminate quickly after rehire. (See Example E)
Rule of Parity: If an employee is 0% vested and has at least 5 consecutive one-year breaks in service, the employee incurs a rule of parity break in service. Under the rule of parity, you may disregard any service prior to the 5 (or more) consecutive one-year breaks in service. In other words, the employee would “start over” with determining their eligibility to participate in the plan. The rule of parity does not apply for participants who are vested. (See Example F)
Example E. Alex Smith entered the Plan on July 1, 2019. He terminated September 1, 2019 and was rehired December 15, 2021. Alex incurred a one-year break in service for the 2020 plan year. Since the plan has the one-year break in service (hold out rule), Alex is not immediately able to participate on his rehire date, he first needs to complete a year of service. If Alex works 1000 hours during 2020, he will retroactively participate again on his rehire date and her account would be credited for her time worked pre-break in service.
Example F. Becca Smith was hired June 15, 2010. From June 15, 2010 through June 14, 2011 she worked 1,000 hours and entered the plan on July 1, 2011. She terminated employment on September 1, 2011. At that time she was 0% vested. Becca was rehired January 1, 2020. Since the plan has the rule of parity language, she was 0% vested at time of termination and has incurred at least 5 consecutive breaks-in-service, her pre-break in service would be disregarded and she would start over as a new employee.
Vesting
The break in service rules above will also help in determining a rehired employee’s vesting. If a plan does not have break in service rules, the service pre-termination and post-termination would be added together to determine an employee’s vesting.
If the plan has the one-year break in service rules, service prior to termination is temporarily disregarded until the employee again completes a year of service. Once an employee completes a year of service, the pre-termination service will get added together with any post-break in service to determine the employee’s vesting.
If the plan has the rule of parity, service prior to termination is permanently disregarded. An employee’s vesting is determined based on the post break-in service time in which the employee is employed.
Forfeitures
Your plan will go into detail on when a participant’s non-vested portion of their account will be forfeited. Some forfeit upon a specific number break in service or, some will forfeit upon earlier of payout of vested distribution or specific number break in service. Your plan also may have “deemed” distribution language forfeiting accounts for those participants who are 0% vested upon their date of termination or last day of the plan year of termination. In addition to the forfeiture language, your plan will also provide details on what to do if a participant is rehired and their account has previously been forfeited. Your plan may allow for immediate restoration of forfeiture. Alternatively, if a participant received a distribution from the plan, the plan may require the participant to repay the distribution back to the plan before their account would be restored. If the employee repays the distribution, it must be by the earlier of 5 breaks in service or 5 years after re-employment.
Distributions
How do you handle a participant who is rehired and in payout status? Unless the plan document specifically states to continue paying installments, or that in-service distributions are allowed, payments to a rehired employee will stop until the participant terminates employment again. Before approving distribution payments, consider whether a former employee has been rehired and is possibly no longer entitled to a distribution. Are there any participants who were previously terminated who are now active? If so, how should you handle based on the language in your plan document?
As you are preparing your census for your upcoming plan year end, make note of rehires and ensure you have provided employment history so your plan administrator can correctly determine the employee’s eligibility to participate in the plan, calculate breaks in service, vesting, etc.
Ultimately, your plan document will be your source for determining the rules your plan follows in terms of how to handle rehired employees. However, reach out to your plan administrator if you have additional questions.
