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TRI Pension ServicesThe ERISA Outline Book Sample Chapter The following excerpt is from Chapter 2 of the 1998 Edition (Fourth Edition) of The ERISA Outline Book. Please note that the sample below is for content review purposes and does not represent the actual layout of the outline material.
The minimum age and service requirements establish parameters on a plan's eligibility conditions that relate to an employee's age and length of service. If the plan imposes more restrictive age and service requirements for eligibility to participate, the plan is in violation of ERISA and the qualification requirements under the tax code.
A plan cannot require an employee to reach an age older than 21 as a condition of becoming a participant in the plan. IRC §410(a)(1)(A)(i)/ERISA §202(a)(1)(A)(i). 1. Exception. If the plan covers only employees of an educational institution (as defined in IRC §170(b)(1)(A)(ii)), and the employer is a tax-exempt organization, the age requirement may not exceed 26. This exception does not apply unless a participant becomes 100% vested after no more than one year of service. IRC §410(a)(1)(B)(ii)/ERISA §202(a)(1)(B)(ii). 2. More liberal rule permitted. The statutory age requirement is only a minimum standard. The plan may be more liberal by imposing a younger age requirement or by not imposing any such requirement. 3. Historical note. For plan years beginning before January 1, 1985, a plan could set the age requirement as high as 25.
As a general rule, the plan may require no more than one year of service as a condition of becoming a participant in the plan. IRC §410(a)(1)(A)(ii)/ERISA §202(a)(1)(A)(ii). 1. More liberal rule permitted. The statutory service requirement is only a minimum standard. The plan may be more liberal by imposing a lesser service requirement or by not imposing any service requirement. 2. Two years of service exception. If the plan provides for immediate vesting, it may exceed the one year of service requirement. See Part C. a. 401k plans. A 401(k) arrangement must not exceed the
one year of service requirement under any circumstances. IRC §401(k)(2)(D).
This restriction applies only to the 401(k) portion of the plan, meaning
the portion of the plan that entitles the employee to elect to defer compensation.
A plan that includes a 401(k) plan arrangement may use the "two years
of service" rule (described below in Part C.) for other portions
of the plan, such as the matching contribution portion or the profit sharing
contribution portion. If the plan provides for immediate vesting, it may require up to two years of service as a condition of becoming a participant in the plan. IRC §410(a)(1)(B)(i)/ERISA §202(a)(1)(B)(i); Treas. Reg. §1.410(a)-3T. 1. Immediate vesting defined. "Immediate" vesting means an employee is 100% vested in all benefits that accrue to his benefit, regardless of the number of years of service completed. If a plan includes a vesting schedule, where the percentage of vesting depends on years of service, the plan may not use this two years of service rule. 2. 401(k) plan. The section 401(k) arrangement in a qualified plan may not impose this two years of service rule. See the earlier discussion in Part B. 3. Historical note. At one time, this rule permitted a three years of service requirement. TRA '86 amended the rule for plan years beginning after December 31, 1988. When the plan was amended for TRA '86 the three-year rule had to be eliminated on a retroactive basis to a date no later than the first day of the 1989 plan year. Most plans have past the deadline for amending for the TRA '86.
Part D., Plan may require both age and service conditions A plan may impose both an age and a service requirement. In such case, the employee is considered to meet the requirements after the later of the two requirements is satisfied. For example, suppose a plan requires completion of one year of service and attainment of age 21. If an employee is hired at age 18, and completes a year of service in the first 12 months following his employment date, he would not complete the eligibility conditions until after he satisfies the age requirement.
The plan may not impose an eligibility condition that on the surface appears to be unrelated to age or service, but in reality is an age or service condition that violates the minimum age or service standards prescribed by the statute. Treas. Reg. §1.410(a)-3(e)(1). 1. Part-time or seasonal employees cannot be excluded
by classification. Exclusion of part-time employees or seasonal employees
by category, where the term "part-time" employees is defined
on the basis of a customary work schedule (e.g., less than 20 hours per
week), is an impermissible service condition, because the exclusion relates
solely to the employee's service. See Treas. Reg. §1.410(a)-3(e)(2),
Example (3). Under the one year of service definition (see Section III,
Part A., of this chapter), it is possible that a part-time or seasonal
employee could be credited with enough hours of service to earn a year
of service. For example, a part-time employee who normally works less
than 20 hours of service per week, might end up working substantially
more hours because of a special project, overtime or busy seasons. If
such employee were excluded from the plan solely because of his classification
as a part-time employee, the plan would be in violation of the minimum
service requirements. 3. Using proper means of classification to exclude employees. A plan may exclude an employee (including a part-time employee) on the basis of some other classification that is not related to service (e.g., exclusion of "hourly paid" employees). See Section IV, Part F.
Part F., Maximum age condition not permitted A plan may not prohibit an employee from becoming a participant (or from continuing participation) merely because he reaches a certain age. IRC §410(a)(2)/ERISA §202(a)(2). 1. Historical note. For plan years beginning prior to
January 1, 1988, a target benefit plan or defined benefit plan was permitted
to impose a maximum age condition. That condition could not be more than
five years before normal retirement age. OBRA '86, §9203(a)(2), amended
the law to eliminate this maximum age exception. The OBRA '86 amendment
coordinates with amendments to the Age Discrimination In Employment Act.
A target benefit plan or defined benefit plan might have contained a maximum
age exclusion in post-1987 plan years because the plan had not yet been
amended for OBRA '86. When the OBRA '86 amendments were adopted, they
had to repeal the maximum age exclusion retroactive to the 1988 plan year.
The amendment deadline for OBRA '86 is the same as the deadline for TRA
'86, and that deadline has past for most plans. It is possible to design the plan to include different eligibility requirements for different groups of employees, or to have different eligibility requirements for different parts of the plan. 1. New business. When a new business establishes a plan, it may wish to have very liberal entry rules for the current employees and more restrictive rules for future employees. For example, a corporation formed in 1996 might adopt a plan, effective in 1996, under which all employees hired by a certain date (e.g., December 31, 1996) are eligible immediately, but future hires are subject to a one year of service requirement.
3. Existing plan. Under an existing plan, the employer might wish to amend the plan to impose more restrictive eligibility rules for future employees, but "grandfather in" the current employees under the present rules. For example, a plan that started with no service requirement might be amended to impose a one year of service rule, but current participants who do not satisfy the one year of service requirement might be grandfathered in for continued participation in the plan. 4. Different rules for different plan features. Where a plan has different features that relate to a participant's right to accrue benefits, the plan may impose different eligibility rules for those features. For example, a section 401(k) plan that also includes an employer profit sharing contribution formula, might allow employees to participate in the 401(k) portion of the plan after three months with the company, but impose a one year of service requirement for the profit sharing portion of the plan. 5. Coverage rules may present a problem. The "dual
eligibility" systems described in 1., 2. and 3., although not a violation
of the minimum eligibility standards, may create a coverage problem. As
a general rule, "dual eligibility" will rarely create a coverage
problem where the most restrictive requirements do not exceed one year
of service. However, if the plan has allowed employees who have not satisfied
one year of service to be admitted to the plan, but other employees must
satisfy a one year of service requirement, coverage may be a problem if
certain participants continue to fail to satisfy the one year of service
requirement. This may occur, for example, in the "open enrollment"
situation discussed above in 2. The effect of dual eligibility on coverage
testing is discussed in more detail in Chapter 8 (Section VIII, Part C). There are a number of options available in defining the eligibility requirements for the plan. The written terms of the plan will control. For example, if the plan document states that the service requirement is one year, the plan must be administered in accordance with those terms. Even though a two years of service requirement might be legally permissible, it would be a violation of the terms of the plan if the plan was administered under a two-year eligibility rule. If the employer wishes to change the plan's eligibility conditions, it must amend the plan. Failure to follow the terms of the plan is a disqualifying event under the tax code and also is a violation of ERISA. In addition, administering the plan contrary to its terms can result in some employees accruing lesser benefits than the plan entitles them to. A plan can be operated in a manner that is contrary to its terms in the following circumstances: 1) when the law has changed and the plan is required to follow the new law requirements before the plan is amended to reflect those changes (see, for example, Rev. Proc. 97-41, regarding compliance with law changes made by the SBA '96), and 2) when terms of the plan violate ERISA (see Section VI, Part C., of Chapter 13 regarding the fiduciary's duty not to follow the terms of the plan if those terms are contrary to ERISA.) 1. Plans terms can be more liberal than the statutory requirements. Throughout this chapter we note that the plan can be more liberal than the statutory requirements. "More liberal" means that the plan's eligibility conditions admit employees into the plan sooner than ERISA's minimum standards would require. Although it is legally permissible to have more liberal eligibility conditions in the plan, the plan document must reflect such conditions before it can be operated in that manner. a. Example. A 401(k) plan provides that the eligibility
conditions are age 21 and one year of service. Although the plan requires
a year of service for eligibility purposes, the plan administrator allows
an employee to commence participation in the plan after six months of
employment. This is a violation of the terms of the plan. If the employer
wishes to accelerate eligibility, the plan must be amended accordingly.
A plan measures a year of service by counting "hours of service" during an "eligibility computation period." The law defines a year of service as an eligibility computation period in which at least 1,000 hours of service are credited. IRC §410(a)(3)(A)/ERISA §202(a)(3)(A). The plan may require fewer than 1,000 hours for a year of service, because that is being more liberal than the statutory minimum standard. However, the plan cannot require more than 1,000 hours of service for a year of service. The number of hours required for a year of service, and the method of counting hours of service, will be determined by the plan document. See Chapter 1 for the definition of hours of service and the crediting methods available.
Part B., Eligibility computation period The DOL regulations prescribe minimum requirements for measuring the eligibility computation period. The eligibility computation period must be a period of 12 consecutive months. 1. Initial period. The first eligibility computation period must begin on the employee's employment commencement date ("ECD"). DOL Reg. §2530.202-2(a). For example, if an employee's ECD is May 18, 1994, the first eligibility computation period runs from May 18, 1994, through May 17, 1995. An employee's ECD is the first day he receives credit for one hour of service. 2. Subsequent periods. Following the first period, the eligibility computation period may be defined as the plan year or as the 12-month anniversary periods of the initial eligibility computation period. The plan must define which method it will use to determine eligibility computation periods. No other method is acceptable in determining whether the statutory requirements are satisfied. a. Shifting to plan year. If the plan defines the subsequent periods to be the plan year, the second eligibility computation period begins with the first plan year that begins after the employment commencement date. Thus, there is an overlap between the first and second periods when the plan year definition is used, except the case where an employee's ECD is the first day of the plan year. Hours of service credited during the overlap count for both periods. DOL Reg. §2530.202-2(b)(2). 1) Example. Wayne's initial computation period starts
August 8, 1994, and ends August 7, 1995. The plan defines subsequent computation
periods as the plan year. The plan year is the calendar year. Wayne's
second computation period is the plan year beginning January 1, 1995,
and ending December 31, 1995. Therefore, between January 1, 1995, and
August 7, 1995, the first and second computation periods overlap. Any
hours of service Wayne is credited with during that overlapping period
count toward a year of service for both computation periods. Following
the 1995 plan year, Wayne's future computation periods are consecutive,
measured on the basis of each succeeding plan year. a) Example. A plan shifts the eligibility computation period to the plan year following an employee's initial computation period. The plan year ends June 30. Effective January 1, 1999, the employer amends the plan year to a calendar year, creating a short plan year from July 1, 1998, through December 31, 1998. Under the overlapping periods rule, one eligibility computation period will run for the full 12 months from July 1, 1998, through June 30, 1999, even though the short plan year ends December 31, 1998, and another eligibility computation period will begin January 1, 1999, and end December 31, 1999, coinciding with the amended plan year period. The eligibility period that begins July 1, 1998, and the eligibility period that begins January 1, 1999, overlap for six months. Thereafter, subsequent eligibility computation periods will begin on each January 1, coinciding with the new plan year period. b) The plan may not use the short plan year as the computation period and prorate the hours of service requirement, unless the overlapping period alternative is provided to employees who cannot satisfy the proration requirement. i) Example. Suppose in the prior example that the plan provided for a short eligibility computation period running from July 1, 1998, to December 31, 1998. A year of service is credit for that short period if an employee completes at least 500 hours of service (i.e., one-half the normal hours requirement to reflect the six-month length of the eligibility period). Martha has an erratic work schedule. For the short period, she only is credited with 400 hours. However, from January 1, 1999, through June 30, 1999, she is credited with 620 hours. Because of the use of the short period, Martha fails to get credit for a year of service with respect to her 12-month eligibility period that starts July 1, 1998. This is a violation of the minimum standards. The prorated hours requirement for the short period would be an allowable provision, so long as the plan provides an alternative that credits a year of service if an employee completes at least 1,000 hours of service for the 12-month period starting July 1998, through June 30, 1999. 3) Plan year usually matches the vesting computation period. Many plans use the shifting method to measure the eligibility computation period because the plan also uses the plan year to determine years of service for vesting purposes (known as the vesting computation period). See Chapter 4, Section IV. This way the hours counted for the plan year are used for more than one purpose. b. Anniversary periods. If the plan defines the subsequent periods to be anniversary periods of the initial computation period, the second period will begin on the anniversary of the employee's ECD. See DOL Reg. §2530.202-2(b)(1). Under the anniversary method, the first and second periods will be consecutive and will never overlap. 1) Example. Assume in the example in 2.a.1), the plan defined subsequent computation periods as anniversary periods. Wayne's second computation period would begin August 8, 1995, and end August 7, 1996. There would be no overlap between his first eligibility period and his second eligibility period. c. Importance of subsequent periods. An employer or administrator may question the purpose of defining eligibility computation periods after the initial period, particularly in a plan that requires only one year of service for eligibility. There are several reasons why the second and subsequent eligibility periods may be important. 1) In a one year eligibility plan, an employee may not have enough hours of service in the initial period to qualify for participation. The plan needs to define subsequent periods to determine whether the employee becomes a participant in a later year. 2) If the plan requires two years of service for eligibility, an employee will need at least two eligibility computation periods before he can qualify for participation. Under a two-year plan, it is recommended to use the anniversary periods approach. If the plan shifts to the plan year, an employee usually is credited with at least 1,000 hours in the first and second periods, which overlap, and entry into the plan is accelerated. a) Example. A plan requires two years of service for eligibility purposes. The computation period shifts to the plan year after the initial period. The plan year is a calendar year and entry dates are January 1 and July 1. Marta commences employment on September 1, 1995. Her initial computation period is September 1, 1995, through August 31, 1996. Her second computation period is January 1, 1996, through December 31, 1996. The first two periods overlap for eight months (January through August). As a full-time employee, Marta is credited with over 1,000 hours of service just during the overlapping period. Hours credited in that overlapping period will apply to both computation periods. Therefore, by December 31, 1996, after only 16 months of employment, Martha has two years of service for eligibility purposes. Her entry date is January 1, 1997. See Section IV of this chapter for a discussion of entry dates. b) In the above example, if the plan used anniversary periods, Martha's second computation period would be September 1, 1996, through August 31, 1997. She would not enter the plan until January 1, 1998, a full year later. 3) Under the break in service rules (see Section V of
this chapter), an employee may temporarily or permanently lose credit
for previously earned years of service, depending on what happens in subsequent
eligibility computation periods. Eligibility computation periods are used
to measure breaks in service as well as years of service. 1) Example. Florence's ECD is August 1, 1998. She is credited with 70 hours per month. The plan shifts the eligibility computation period to the plan year (which ends every December 31). Florence's first eligibility computation period runs from August 1, 1998, through July 31, 1999. During that period, she is credited with only 840 hours, which is not enough to earn a year of service. Florence's second eligibility computation period runs from January 1, 1999, through December 31, 1999, because the period is shifted to the plan year. During that period, she also is credited with only 840 hours. Although by December 31, 1999, Florence's cumulative hours from August 1, 1998, through December 31, 1999, total 1,190, she has not earned a year of service for eligibility purposes because she did not complete at least 1,000 hours in a 12-month eligibility computation period. 2) The plan described in the prior example could be written
more liberally so that an employee like Florence would become a participant.
For example, the plan could provide for a cumulative hours of service
rule, giving an employee credit for a year of service after they have
accumulated at least 1,000 hours of service, even if those hours are not
completed in a single eligibility computation period. Alternatively, the
plan could be written to require fewer than 1,000 hours of service in
an eligibility period to earn a year of service. a. Example. Marjorie is a full-time employee and works 160 hours per month. She commences employment on May 1, 1999. During December she actually reaches 1,000 hours of service. Nonetheless, she does not receive credit for a year of service until April 30, 2000, the end of her initial computation period. If the plan provides for entry on the first day of the month following completion of the year of service, Marjorie's entry date is May 1, 2000, because her year of service is considered completed on April 30, 2000. b. Plan may provide for credit sooner. Remember, the rules discussed in this section are the statutory requirements, which are designed to set minimum standards to protect employees. The plan can be written more liberally, so that a year of service is credited before the end of the eligibility computation period. 1) Example. Suppose in the prior example that the plan document is written so that a year of service is credited as of the end of the month in which the 1,000th hour of service is completed during the eligibility computation period. Consequently, Marjorie receives credit for a year of service on December 31, 1999. Under the plan's entry date system described in the prior example, Marjorie's entry date is accelerated to January 1, 2000. A plan should not be administered in this fashion unless the terms of the plan expressly provide for this method of crediting a year of service. c. Continuous employment not required. The fact that a year of service is not credited until the end of the 12-month eligibility period does not mean the employee must be employed continuously during the 12-month period in order to receive credit for the year. In fact, the employee does not even have to be employed on the last day of the computation period to receive credit for the year of service. 1) Example. Assume Janelle's ECD is June 4, 1999. Her
initial computation period will end June 3, 2000. Janelle works until
November 10, 1999, and is laid off. On February 2, 2000, she is rehired.
Although Janelle is not employed continuously from June 4, 1999, through
June 3, 2000, her initial eligibility computation period is still measured
on that basis. If during her periods of employment during that initial
computation period she receives credit for at least 1,000 hours of service,
the plan must credit her with a year of service as of June 3, 2000.
All service with the employer must be credited, even service before the plan is established, unless disregarded under the break in service rules (discussed in Section V of this chapter). IRC §410(a)(5)(A)/ERISA §202(b)(1). 1. Service requirement may be completed as of plan's effective date. When an employer first establishes a plan, a current employee may already have completed the minimum service requirement. Unless there are other conditions preventing the employee from becoming a participant, such as an age condition or an employment classification, such an employee would become a participant as of the effective date of the plan. 2. Example. Tasha's ECD is August 1, 1995. Her employer
establishes a new profit sharing plan effective January 1, 1999. The eligibility
requirements are one year of service and age 21. As of January 1, 1999,
Tasha has already completed a year of service for eligibility purposes.
There are no break in service rules that apply to Tasha. Tasha's entry
date is January 1, 1999 (i.e., the effective date of the plan) unless
she has not satisfied the age requirement as of such date. The plan cannot
disregard Tasha's service before 1999 and require her to earn another
year of service in an eligibility computation period that starts on or
after January 1, 1999, as a condition for becoming a participant in the
plan. An employer can avoid having to keep track of hours of service by using the elapsed time method to credit service. Under the elapsed time method, the plan would simply track the periods of service (without regard to hours completed) that are credited since the employee's ECD. After 12 months of service, the employee receives credit for one year of service. If the plan requires less than a year of service (e.g., 3 months), the service requirement would be satisfied after the employee has three months of service credited under the elapsed time method. See the definition of elapsed time in Chapter 1 for more detailed information about how this method works. When the elapsed time is used, the plan administrator need not keep track of eligibility computation periods because the plan is not using a counting-hours method to define a year of service. 1. Easier for part-timers to satisfy eligibility requirements. One disadvantage of the elapsed time method is that an employee can qualify under a year of service requirement regardless of the number of hours of service that would have been credited. A part-time employee might be excluded from the plan if, instead of using elapsed time, the plan defined a year of service as 1,000 hours of service in an eligibility computation period as discussed earlier in this section. 2. Some absences are counted as service periods. Although elapsed time looks at continuous employment, certain absences are disregarded and the employee is deemed to be in continuous employment during such periods. For example, absences of less than 12 months, regardless of the reason for the absence, are treated as if the employee was employed during that absence. This rule (known as the "service-spanning rule") makes the elapsed time method ineffective in excluding seasonal employees. A seasonal employee might be excluded from the plan if, instead of using elapsed time, the plan defined a year of service as 1,000 hours of service in an eligibility computation period, as discussed earlier. a. Example. Butch is a seasonal employee. He works from May through August and from November through January. During his periods of employment, he is credited with 70 hours per month. Butch's ECD is May 1, 2000. The plan requires a year of service to become a participant, but uses the elapsed time method to credit service. At the end of Butch's first employment cycle, which ends August 31, 2000, Butch as four months of service under the elapsed time method. Butch returns to work on November 1, 2000. Although Butch was absent in September and October, the service spanning rules result in credit for service under the elapsed time method. By the end of Butch's next employment cycle, which ends January 31, 2001, Butch now has seven months of service under the elapsed time method. The period elapsed from May 1, 2000 (which was his ECD) to January 31, 2001, is treated as a period of continuous employment because of the service spanning rules. Butch's third employment cycle begins May 1, 2001. Again, because his absence is less than 12 months, the absence period from February 1 through April 30, 2001, is treated as continuous employment under the service spanning rule. Therefore, Butch is credited with one year of service for eligibility purposes as of April 30, 2001. b. Example. Suppose the plan used the counting-hours method instead of elapsed time, and required at least 1,000 hours of service in an eligibility computation period for a year of service. Butch's initial eligibility computation period runs from May 1, 2000, through April 30, 2001. During that period he is credited with 70 hours in 7 months, for total hours of 490. Butch would not satisfy the plan's eligibility requirement as of April 30, 2001, as he did in the prior example.
Some plans require less than one year of service to become a participant. The tax code, ERISA and the applicable regulations do not address the crediting of these lesser service conditions. However, such conditions are legally permissible, so long as the minimum statutory standards are not violated. 1. Counting hours method. If a counting hours method is desired, the plan must define how the service condition will be satisfied. For example, a plan might require three months of service, defining three months of service to be any three consecutive calendar months in which the employee is credited with at least 250 hours of service. Alternatively, a plan might define months of service as a certain number of hours of service (e.g., 80 hours) credited in a calendar month. a. Cannot violate minimum statutory standards. When the plan defines a less-than-one-year service condition in terms of hours of service credited in a certain period, care must be taken that the plan does not violate the minimum statutory standards of one year of service (or two years of service, if 100% immediate vesting is used). For example, where a plan requires three months of service, and defines months of service as a month in which an employee has at least 80 hours of service, the one year of service rule might be violated. It is possible that an employee with an erratic work schedule could have at least 1,000 hours in a 12-month eligibility computation period (entitled to one year of service credit), as discussed earlier in this section, but not have at least three months with 80 hours or more. To keep the employee out of the plan on the basis of the three-month rule would be a violation of the statutory standards in this case. This issue is also discussed in Section IV, Part E., in the context of the application of the statutory entry date rules to plans with only one entry date. 1) Example. Carrie's ECD is July 1, 2001. The plan provides for a 3-month eligibility condition. A month of service is defined as at least 100 hours of service in a calendar month. Carrie is credited with 90 hours of service per month. Her initial eligibility computation period under the statutory standards is measured from July 1, 2001, through June 30, 2002. During that period, she has 90 hours per month for 12 months, for a total of 1,080 hours. However, she has not completed the plan's eligibility requirement of three months of service because she has not received credit for at least 100 hours in three different calendar months. Failure to make Carrie a participant on the basis of the plan's service condition would be a violation of the statutory minimum service standards. 2) An employer might want to use a 100-hour standard for its 3-month rule in order to accelerate the entry of its full-time (or substantially full-time) employees. This is legally permissible, so long as there is an alternative to accommodate someone like Carrie in the prior example. For example, the plan could be written as follows: To become a participant in this plan, an employee must be at least 21 years of age and must complete one of the following service requirements: 1) a total of three calendar months in which at least 100 hours of service is credited in each month, or 2) a year of service. A year of service is completed by earning at least 1,000 hours of service in an eligibility computation period (as defined in section x of the plan). By defining the eligibility requirement in this manner, a typical full-time employee will satisfy the service requirement in his first three months of employment. Nonetheless, the statutory requirements are satisfied because an employee like Carrie in the prior example will satisfy the year of service requirement and qualify for the plan under that rule. This approach satisfies the objective of admitting certain employees into the plan more quickly without making it easier for part-time employees to qualify for participation in the plan. b. Using nonstatutory computation periods. Sometimes an employer wants to use alternative computation periods that are not in line with the statutory periods. Again, such an approach would be legally permissible so long as the minimum standards are not violated. 1) Example. A profit sharing plan provides that an employee will become a participant following the first calendar year in which the employee completes at least 1,000 hours of service. The plan year runs on a calendar year. Two employees commence employment on June 1, 2000. Joan works 150 hours per month and Riley works 100 hours per month. As of December 31, 2000, Joan has completed over 1,000 hours (i.e., 7 months x 150 hours). Her participation commences in the plan on January 1, 2001. However, Riley does not complete 1,000 hours in 2000. The first calendar year in which he completes 1,000 hours is 2001. Under the plan's eligibility provision, Riley does not become a participant until January 1, 2002. This violates the statutory requirements. Under the statutory definition of an eligibility computation period, Riley's initial eligibility computation period runs from June 1, 2000, through May 31, 2001. During that period he is credited with at least 1,000 hours. The plan does not credit Riley with a year of service until December 31, 2001, yet he has completed a statutory year of service as of May 31, 2001. By postponing his credit for a year of service until December 31, 2001, the plan is violating the minimum statutory requirements, because Riley's participation in the plan is postponed to January 1, 2002. See the statutory entry date rules in Part A. of Section IV of this chapter. 2) The employer may like the approach taken in the prior example because hours are tracked only for a calendar-year period, and full-time employees, like Joan, are able to enter the plan more quickly. Nonetheless, the plan must be written to satisfy the statutory requirements. One solution is to retain the rule described in the example, so that employees like Joan are able to enter the plan more quickly, but also provide for an alternative entry date rule based on the statutory computation periods. This way, Riley will enter the plan on a timely basis. 2. Elapsed time or no hours requirement will alleviate problem. If the plan requires less than one year of service for eligibility, but does not require a minimum hours of service requirement, then there should be no concern about violating the statutory service requirement. For example, suppose a plan requires three months of service for eligibility, and defines three months of service to mean three months following the employee's employment commencement date, without regard to the number of hours of service credited to the employee for that three-month period. It would not be possible for an employee to satisfy the statutory one year of service requirement without also satisfying the plan's three-month eligibility rule, so the statutory requirement is satisfied. Another option is to use the elapsed time method (see the earlier discussion in Part D), where service is measured by the amount of time elapsed during an employee's employment period, without regard to hours of service. 3. Inclusion of part-time employees more likely. One possible drawback about using a less-than-one-year service requirement is that a part-time employee may be more likely to qualify for the plan. The employer should consider this effect in determining whether the plan design is consistent with the employer's objectives in maintaining the qualified plan. This can be avoided by using an approach like the one described in paragraph a.2) above.
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