Following Retirement Plan Rules When a Part-Time Employee Is Hired Full-Time

When an employer decides to hire full-time that part-time or seasonal employee, he is not treated as a new hire in every way.

As far as enrollment materials and disclosures for retirement plans, the employee should receive the same materials as any new hire, but when it comes to calculating eligibility and vesting, hopefully the employer has kept records of past service.

“Good recordkeeping is always critical. Employers have obligations to keep records of employment for other laws such as minimum wage and overtime regulations as well,” says Linda Way-Smith, of counsel at Morgan, Lewis & Bockius LLP in Washington, D.C. “The general rule is to keep information for at least six years, but actually, it varies.”

“We actually keep participant level data virtually forever,” says Tim Chisholm, vice president and benefits consultant for Fidelity Benefits Consulting team, based in Covington, Kentucky. “One could argue that if a person comes back and says, ‘I worked for you in 1988 and think I earned service under the retirement plan and you didn’t put me in,’ the plan sponsors would need records to prove that. It is more likely for pensions, but also could happen for profit sharing plans.”

Determining eligibility and vesting

The employee’s date of birth and date of hire, that is, the hire date for when he first started working part-time or seasonally, is needed to determine eligibility, Chisholm says. In many cases, the actual hours the employee worked while a seasonal or part-time employee is also needed. “Some plans use actual hours, and some use equivalencies, such as elapsed time, which essentially means if an employee works one day out of a month, he gets credit for that month,” he explains.

Way-Smith adds that if the plan uses actual hours but the plan sponsor has not kept records of hours worked, equivalencies are allowed by law.

However, it is important to understand the provisions in the plan document for eligibility and vesting, Chisholm says. If an employee must be age 21 and have a year of service (usually 1,000 hours) to be eligible for the plan, it’s possible that a college student who worked for the plan sponsor during the summers and is hired full-time upon graduation would be eligible for the plan immediately, for example.

Both Chisholm and Way-Smith point out that for most plans, the initial eligibility computation period as spelled out in the plan document is from date of hire to anniversary of date of hire. Chisholm says for many plans, this is changed after the initial year to the plan year.

In a blog post, Way-Smith says, “While many employers exclude student, intern, or seasonal employees from participating in their retirement plans, summer employment counts toward the satisfaction of any eligibility service requirement for retirement plan participation. Under Code Section 410(a)(1)(A)(ii), a plan cannot require more than one year of eligibility service for participation. Employees accrue eligibility credit for all service during the eligibility computation period, even time worked before the employee was in a class of employees entitled to retirement benefits. An employee’s eligibility service also includes time worked with any related employers, such as members of a controlled group under Code Section 414(c) or an affiliated service group under Code Section 414(m).”

The computation period for vesting service is defined by most plans as the plan year. According to Chisholm, most plans require 1,000 hours. So, a part-time or seasonal employee may already have past vesting service when they are hired full-time and become eligible to participate in the retirement plan.

“Some plan sponsors use their recordkeeper to determine eligibility and vesting, and others have their own system in place,” Chisholm says. “A lot of times payroll systems are programmed to calculate eligibility and provide the recordkeeper with information once an employee becomes eligible.”

Way-Smith says if a plan sponsor and recordkeeper disagree about a person’s eligibility or vesting service, they would want to consult with a benefits attorney about the specific case.

Breaks in service

Rules regarding eligibility and vesting are complicated when employees transition directly from part- to full-time employment, but can be even more complicated if the employee terminated and is later rehired.

The length of employment before the break, the length of the gap in service, the timing of the rehire (for example, during the eligibility computation period or after), and the plan terms are all important factors to consider, according to Way-Smith. If the gap is brief, the employee might continue to earn eligibility service as if he never left. But if the gap is lengthy the employee may have to start anew. For example, the law allows a plan sponsor to treat a rehire as new for purposes of plan eligibility if he had the greater of five breaks-in-service or breaks-in-service equal to the years of service prior to termination, Way-Smith says. Or, an employer may take a “wait and see approach,” waiting a year before any prior eligibility service is restored. Every plan should specify the rule that will be applied

Chisholm says many plans are written so that if an employee is rehired, he is immediately eligible as long as he satisfied eligibility requirements the first time of employment, even if the first time of employment was in a part-time or seasonal capacity. However, if he never did when working part-time, he would have to satisfy eligibility requirements as if he never worked there before.

However, according to Chisholm, for vesting, since the computation period is different, it is possible that a part-time or seasonal employee could have years of vesting service from the pre-break in service at the time he becomes eligible.

Way-Smith says plan sponsors definitely need to read the law and plan provisions together.