For plans that accredit service based on hours worked and not on elapsed time, part-time or seasonal employees could be excluded from class, unless and until they earn at least 1,000 hours of service over a 12-month period (or in a plan year after the initial calculation period), even if the. Usage information for benefit counselors and benefit plan sponsors. By Christine Roberts, in 401 (k) plans, ADP %26 ACP Testing, previous posts, Leave a comment on the FAQs about the new 401 (k) plan coverage rules for long-term and part-time workers Notify me of new posts by email. Enter your email address to subscribe to this blog and receive notifications of new posts by email.
Normally, a service interruption is defined as a year in which an employee has not completed more than 500 hours of service. Employers with plans that include part-time exclusions or other classes should review their plans to determine if the plan's language provides fail-safe protection in the event that a part-time employee completes 1000 hours of service in an eligibility calculation period. This means that a seasonal employee who works a few weeks in the winter, several months during the summer and a few weeks during the vacation could work 1,000 hours during that period and be eligible for the plan at a later rehire date. Similarly, the QAB states that the IRS would not challenge a provision of the plan that requires one year of service to participate and excludes employees who pay by the hour (those employees defined by the plan as receiving an hourly wage for their services) would not be challenged by the IRS because the plan does not exclude employees who pay by the hour based on their age or service requirement.
In the QAB published earlier this year, the IRS warned that an employer who received a determination letter on July 1, 2001 or after the publication of the revised Publication 79 cannot rely on its determination letter to protect the plan from retroactive disqualification if the plan includes an age or service requirement that is not allowed. In the case of a 401 (k) plan, the contribution required for each unduly excluded employee would be an amount equal to the average deferral percentage of the employee's test group for non-discrimination testing purposes (high or not high) plus an equivalent contribution (if the employer matched) and the income attributable to the deferral and counterpart amounts, for each year of the plan in which the employee was excluded. In the QAB, the Service indicated that, after the opening of the EGTRRA determination and pre-approval letter programs, agents will begin to request that plan administrators eliminate or clarify language if a plan includes a provision that defines an exclusion classification by service and the plan's disposition could result in the exclusion, due to a minimum service requirement, of an employee who has completed one year of service. Despite the costs of voluntary correction, following the corrections program is much more cost-effective than discovering the plan's defect during an IRS audit, since the IRS would impose a penalty in addition to requiring the employer to provide contributions and profits to excluded employees.
The plan also defines a part-time or seasonal employee as one who works less than 1,000 hours of service in an eligibility calculation period.