Posted by Maria T. Hurd, CPA
In the world of qualified plans, an employee must be given credit for a ‘year of service’ for any ‘computation period’ during which the employee is credited with ‘1,000 hours of service.’ How each of these criteria is defined in the plan document can make all the difference. To add more confusing alternatives, the employer must choose whether their computation period will be defined as a plan year, calendar year, or employment year.
Hire Date Anniversary vs. Plan Year as the computation period
For eligibility purposes, the initial computation period must begin with each employee’s date of hire. When plans grant service credit on a hire-date anniversary, they must keep track of hours-worked on a hire-date anniversary basis for each employee, FOREVER. In my experience, clients who have to keep track of service for a different computation period per employee tend to have a lot of difficulty tracking service accurately. Although an employee’s initial computation period for determining eligibility service must begin with his or her employment date, the employer can convert to using another type of computation period after the first 12 months of employment, provided the beginning of the new computation period overlaps with the first employment year. As a practical matter, the eligibility computation period should switch to the plan year after the initial computation period.
Two years of vesting for 14 months of employment
Unlike initial eligibility, vesting is a cumulative computation. As a result, a participant could receive two years of vesting credit if the plan’s computation period switches from the hire-date anniversary for the initial year of employment to the plan year for subsequent years. For example, a full-time employee hired on October 1, 2012 would receive one year of vesting credit for the first twelve months of employment ending on September 30, 2013, and another year of vesting service for the plan year ended December 31, 2013.
However, the initial computation period for vesting purposes does not have to be the first 12 months of employment. In fact, the vesting computation period can be defined as the plan year. As a result, the plan could grant vesting credit for any plan year in which the participant works 1,000 hours. (1,000 hours IN a twelve-month computation period, as opposed to 1,000 hours AND twelve months.) In this case, an employee with an October 1, 2012 date of hire would not receive a year of vesting credit for the plan year ended December 31, 2012, and would receive one year of vesting service for the plan year ended December 31, 2013, resulting in one year of vesting service for 14 months of employment. However, a participant could receive 2 years of vesting service for 12 months of employment if the date of hire had been June 1, 2012 and a date of termination of June 1, 2013. If this participant worked 1,000 hours IN each of the 12-month periods ending on the plan’s year end, December 31, the participant would receive two years of vesting credit. What a difference one word makes.
IN vs. AND: What a difference a word makes
Whether eligibility or vesting credit is given for 1,000 hours AND twelve months or 1,000 hours IN twelve months can make a big difference in industries that experience a lot of turnover, such as the fast food industry. Whether an employee who terminates and gets re-hired within their first year of employment becomes eligible to the plan could hinge on just one word. Clients and their service providers must read the terms of the plan carefully when making these determinations so that they can give credit where credit is due.