Excluding Part-Time Employees From Employer Contributions

“I work with an ERISA 403(b) plan at a health care organization. I read your PLANSPONSOR Ask the Experts column indicating that, though in theory it is possible to exclude employees who work fewer than 20 hours per week from the right to make elective deferrals to a 403(b) plan, it is difficult to do in actual practice. But how about excluding such employees from the right to receive employer contributions?”

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

It may be difficult to exclude such employees from receiving an employer contribution as well, but for a different reason than the universal availability requirement that generally allows all employees to make elective deferrals to 403(b) plan. Though the universal availability requirement notably does not apply to employer contributions, Section 202(a) of the Employee Retirement Income Security Act (ERISA) does apply to 403(b) plans that are subject to ERISA, and it can also restrict the ability of an employer to specifically exclude part-time employees from the receipt of 403(b) employer contributions.

Though, in theory, you can exclude any class of employee from the right to receive employer contributions as long as the classification is reasonable and you are not violating federal law (e.g., the Age Discrimination in Employment Act (ADEA)), as a practical matter it is difficult to exclude part-time employees from the right to receive such contributions under this provision. The reason is that Section 202(a) states that no plan may require a service requirement for the receipt of employer contributions that is longer than one year in which 1,000 hours of service is performed (two years if all employer contributions are 100% vested). That means you cannot add a plan provision that would circumvent the waiting period; thus, you could not exclude “part-time” employees if the effect of that exclusion would be to circumvent the service requirement (the classification would no longer be considered reasonable in that case).

However, by merely imposing the maximum service requirement allowed under Section 202(a), as a practical matter, many part-time employees would not receive employer contributions, since many will never perform a “year of service” in which they work 1,000 hours. However, if a part-timer works 1,000 hours in any 12-month period (initially measured as anniversary year, but can be an anniversary year or plan year after that, based on your plan document) throughout his/her working career, even by accident, he/she becomes eligible for employer contributions every year going forward regardless of hours worked—UNLESS she is ineligible for employer contributions for another reason, such as being a member of an excluded class of employees (e.g. a collectively-bargained employee—again, the classification must be reasonable), or by application of the 1,000-hour rule for an allocation of employer contributions each year (see below).

Having said this, some employers do not have the capacity to track hours to this extent, particularly for part-time employees. Thus, some employers use a less restrictive method of crediting year of services, such as an “elapsed-time” method that only tracks continuous employment, and not hours worked. This, method would, of course, treat part-time employees the same as full-time employees for eligibility purposes. Conversely, employers that are able to specifically track hours of service performed by all employees each year are permitted under the law to impose an annual service requirement for the receipt of employer contributions, such as a requirement that 1,000 hours of service be performed in a plan year. However, such a requirement must be applied to part-time as well as full-time employees, so again it is not specifically a “part-time” exclusion.

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.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.