Back to Basics: Eligibility – Sept./Oct. 2015

Federal law sets eligibility requirements for when employees can begin participating in an employer’s plan. In general, a plan may require that employees be at least 21 years old and complete a year of service before they are eligible.

A year of service generally requires employees to complete 1,000 hours of service over a 12-consecutive-month period. Note that plan sponsors may design plans with less restrictive eligibility requirements that will allow earlier entry into the plan.

1,000-hours-of-service eligibility rule

If a plan requires employees to complete 1,000 hours of service in a 12-month period to be eligible to participate, are employees eligible to join as soon as they complete the required 1,000 hours of service?

No. The law requires employees to complete 12 months of service first. Then, a determination is made as to whether or not they have been credited with 1,000 hours of service. Pension geeks call this the statutory eligibility rule because it is based on statute, specifically Internal Revenue Code Section 410(a)(3)(A) and ERISA Code Section 202(a)(3)(A).

Example: The sponsor of a plan with a 1,000-hours-of-service eligibility requirement hires an employee on November 11, 2015. The plan has semi-annual entry dates of January 1 and July 1. The employee completes 1,000 hours of service on June 8, 2016, but is not eligible to join the plan at that time or on the next entry date of July 1, 2016. He or she must wait until November 11, 2016, to complete the 12-months-of-service requirement. Since the employee has already completed 1,000 hours of service, he or she will be eligible to enter the plan on the next plan entry date (January 1, 2017).

Although some employers may consider it an act of generosity to permit earlier entry, the law requires that employees reach the anniversary of the day they first performed an hour of service and be credited with 1,000 hours before joining the plan. Again, if the employer wants to allow a shorter eligibility period and earlier entry, the plan may be designed to allow that, but this example is for plans that use the 12-month, 1,000-hour rule.

Though the service computation period is a 12-consecutive-month period, the period may include times when the employee leaves employment and is subsequently rehired. In this situation, the employment periods will be linked, provided the employee does not have a break in service. (A break in service is defined as a 12-month period during which the employee is not credited with at least 501 hours of service.)

Note: Since an employee may return to employment at a later date, plans should determine whether or not employees have satisfied the 1,000-hour requirement on the anniversary of their employment, even if they are not employed at that time. Those who have will be eligible to enter the plan upon being rehired or shortly after.

Elapsed-time eligibility method

The elapsed-time method for determining plan eligibility is an alternative to the hours-of-service method. The elapsed-time method does not count the actual or equivalent hours worked but instead measures the period of time that begins on the employee’s date of hire and continues through the date the employee meets the plan’s eligibility requirements. An employee who is hired on April 15, 2015, and is still employed on April 15, 2016, is considered to have completed one year of service under the elapsed-time method, regardless of the actual number of hours worked during that measuring period.

This method works well for employers who wish to simplify the administrative process of including employees in jobs where counting hours is not always easy or possible (e.g., construction workers, truckers, etc.). However, if the employer’s goal is to exclude any of these job categories from plan participation, the hours-of-service method would be a better choice because employees may be required to complete as many as 1,000 hours of service in a year to become eligible.

The service spanning rule

Under the elapsed-time eligibility method, absences of less than 12 consecutive months are not counted against an employee under the service spanning rule. A break in service (called a “period of severance” for elapsed-time purposes) only occurs if there is an absence of 12 or more consecutive months.

Example 1: A plan has a one-year elapsed-time eligibility requirement. An employee is hired on April 15, 2015, quits on July 26, 2015, and is rehired on February 10, 2016. Under the elapsed-time method, the employee satisfies the one-year service requirement because his absence was less than 12 months, and he is employed on April 15, 2016, the anniversary of his date of hire. The actual number of hours worked is irrelevant.

Example 2: A plan has a one-year elapsed-time eligibility requirement. An employee is hired November 8, 2014, and works until September 17, 2015. The employee leaves and is rehired December 8, 2015. Because she did not have a 12-consecutive-month absence, the employee is considered to have satisfied the elapsed-time one year of service (November 7, 2015) upon rehire. If a participant’s normal entry date into the plan passes during his or her period of absence, the employee is eligible to join the plan immediately upon being rehired, provided there has not been a 12-consecutive-month absence.

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