Crediting Past Service From an Unrelated Employer for Eligibility Purposes

“I work at a health care facility that sponsors an ERISA 403(b) plan. We are attempting to recruit some physicians from a hospital in the area who want to join our retirement plan for employer contribution purposes immediately, but our plan has a one-year wait for employer contributions. Is it possible that we could amend our retirement plan to credit services from the physicians’ prior employer when they come work for us, so that they have don’t have to wait a year to receive employer contributions? The physicians’ current employer is unrelated to us.” 

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

It is possible, but as a practical matter, it may be not be feasible to administer. First of all, let’s take a look at the regulation that covers service for unrelated employers (IRS Treas. Reg. Section 1.401(a)(4)-11(d)(3)(iii)(B)(1) and (2), which applies by reason of Code section 403(b)(12)(A)):

(B) Legitimate business reason –

(1) General rule. There must be a legitimate business reason, based on all of the relevant facts and circumstances, for a plan to credit imputed service or for a plan to credit pre-participation service for a period of service with another employer.

(2) Relevant facts and circumstances when crediting service with another employer. The following are examples of relevant facts and circumstances for determining whether a legitimate business reason exists for a plan to credit pre-participation or imputed service for a period of service with another employer as service with the employer: whether one employer has a significant ownership, control, or similar interest in, or relationship with, the other employer (though not enough to cause the two employers to be treated as a single employer under section 414); whether the two employers share interrelated business operations; whether the employers maintain the same multiple-employer plan; whether the employers share similar attributes, such as operation in the same industry or the same geographic area; and whether the employees are an acquired group of employees or the employees became employed by the other employer in a transaction between the two employers that was a stock or asset acquisition, merger, or other similar transaction involving a change in the employer of the employees of a trade or business. Other factors may also be relevant for this purpose, such as the plan’s treatment of service with other employers with which the employer has a similar relationship and the type of service being credited (e.g., vesting service as compared to benefit service or accrual service). A legitimate business reason is deemed to exist for a plan to credit military service as service with the employer.

So the regulations, on their face, do not appear to present too many barriers to your situation; as long as there is a legitimate business reason to credit the service, and the employer operates in the same industry or geographic area, it would appear that service could be credited, though, as the IRS states, this is a facts and circumstances determination (as opposed to say, a safe harbor, where following the safe harbor language would be deemed to be in compliance by the IRS).

However, if you credit service for the physicians in question, you will have to credit service for all other employees with past service from that employer as well, not just the service of the physicians you are recruiting. As the regulations state, other factors may also be relevant for purposes of determining whether such service should be credited, such as the plan’s treatment of service with other employers with which the employer has a similar relationship. Thus, in order to credit service for just the physicians in question, you might need to include service from other similarly situated employers as well. As a result, you may be faced with the issue of tracking and crediting service from a number of employers just because you wished to credit service to a small group of physicians, meaning it may no longer make sense to credit such service, both from an administrative and cost perspective.

Thus, as with all potential plan amendments, you will want to seek the advice of retirement plan counsel well versed in this area before proceeding.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.