Plans may disregard service when determining eligibility if an employee incurs a break in service. The ftwilliam.com document allows for sponsors to permit two separate breaks in service rules as described below.
- Rule of Parity. With this rule, an employee will lose prior service for eligibility purposes permanently following at least five consecutive one-year breaks in service. Meaning, the employee must start over in satisfying the service requirements on the plan as if he/she were a new employee. For the rule to apply: 1) the employee must be a plan participant when the break in service begins; 2) the employee must incur a minimum of five consecutive one-year breaks in service; and 3) the employee must be zero percent vested in his/her accrued benefit in the plan. For purposes of this rule, deferral accounts in a 401(k) plan are considered employer contributions.
- One-Year Holdout. With this rule, an employee will lose prior service for eligibility purposes temporarily following at least one-year break in service. After the employee completes another year of service, he/she will receive credit for that year entering the plan retroactively. This rule only applies to employer contributions.
The plan document addresses how to handle rehired employees in Section 3.05 – Termination and Rehires. If the plan does not apply the break in service rules or there is no break in service determined if applied, and the employee had satisfied the plan’s eligibility requirements including passing an entry date, the employee must re-enter the plan on his/her rehire date.
Example Rule of Parity:
Previously eligible participant terminates employment on 02/01/2015 at zero percent vested. Employee later rehires on 02/01/2020. Because the employee was gone for at least five consecutive one-year breaks in service, was zero percent vested, prior service is disregarded, the employee will need to meet the service requirements on the plan again.
Example One-Year Holdout:
Previously eligible participant terminates employment on 02/01/2019. Employee later rehires 04/01/2020. Because the employee was gone for one-year break in service prior service is temporarily disregarded for employer contributions. Employee completes another year of service on 03/31/2021, therefore, the rehired employee may enter the plan for employer contributions retroactively on 04/01/2020.