When Do Rehired Employees Qualify for Employer Contributions?

Q: We sponsor an ERISA 403(b) plan. We have an employee who was rehired who was an eligible and participating employee (both employer and elective deferral contributions) in the plan at the time of her termination. Upon rehire, must she start over again and wait a year before she can receive employer contributions again (our plan has a one-year waiting period for receipt of employer contributions) or can she begin to receive employer contributions immediately upon rehire?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: As with many answers in employee benefits, it depends on what your plan documents say. In the vast majority of cases, a rehired employee who was eligible for employer contributions at the time of employment termination will be immediately eligible for such employer contributions upon rehire and will not have to satisfy a new waiting period. However, the plan may require a rehired employee to meet the eligibility requirements if the plan documents include either of these optional provisions: (a) the Rule of Parity, or (b) the One Year Holdout Rule. If the plan document includes either of these provisions in its 403(b) plan, there may not necessarily be an immediate resumption of eligibility for employer contributions for rehired participants.

The Rule of Parity only applies to non-vested participants. If the rehired employee was vested (in either employee or employer contributions) before they initially terminated, the Rule of Parity does not apply. Note that, since elective deferrals are 100% vested, this rule would NOT apply to anyone who made elective deferrals to the plan prior to their original termination of employment, regardless of whether employer contributions were vested or not, since elective deferrals are always 100% vested. If the rehired employee was not vested, the rule allows the rehired employee to be treated as a new employee if the number of consecutive breaks in service is at least equal to the GREATER of (a) five, or (b) the years of service prior to the break in service. As a practical matter, (b) rarely applies since participants with more than five years of service are at least partially vested. Thus, if a plan sponsor maintains this provision in their plan document, non-vested participants who have at least five consecutive breaks-in-service would be treated as new hires and would need to satisfy a new one-year waiting period before receiving employer contributions.

This leaves the remaining optional provision, the One Year Holdout Rule. The One-Year Holdout Rule allows plan sponsors to require that all participants who incur a break in service be required to complete one year of service after rehire before receiving employer contributions. However, once the year of service is completed, contributions must be made retroactively to the participant’s rehire date. Due to the complexities associated with such retroactive contributions, as well as other administrative issues associated with this provision, it is rarely seen in retirement plans.

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.

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