AGE AND SERVICE REQUIREMENTS

Although not all plans have age or service conditions for entry, many employers prefer such conditions because they help to avoid the cost of carrying an employee on the records as a plan participant when the employee quits after a short period of service. Generally, a plan cannot require more than one year of service before eligibility, and an employee who has attained the age of 21 must be permitted to participate in the plan if the employee has met the other participation requirements of the plan. Both age and service requirements can be imposed. For example, for an employee hired at age 19, the plan can require that employee to wait until age 21 to participate in the plan. However, an employee hired at age 27 cannot be required to wait more than one year before participating in the plan.

As an alternative to the one-year waiting period, a plan may provide for a waiting period of up to two years if the plan provides immediate 100 percent vesting upon entry. The two-year provision is often used by employers with very few employees and a high turnover rate—for example, a self-employed physician with one or two clerical or technical employees who have high mobility in their labor market. With a two-year provision, few of the employees may ever be covered.

One problem with these age and service requirements is that it is often desirable for a plan to have entry dates—that is, specific dates during the year in which plan participation is deemed to begin—to simplify recordkeeping. The regulations provide that no employee may be required to wait for participation more than six months after the plan's age and service requirements are met. Thus, a plan having entry dates must adjust its eligibility provisions accordingly.

The Blarp, Inc., pension plan wishes to have a one-year, age 21 entry requirement and to use an entry date or dates. Any of the following options will meet the requirement in the regulations:

* Two entry dates in the year, six months apart, with participants entering on the next entry date after they satisfy the one-year, age 21 condition

* One entry date, but a minimum entry age of no more than 20½ and a maximum waiting period of six months

* One entry date, with participants entering the plan on the date nearest (before or after) the date on which the one-year, age 21 requirement is satisfied

All qualified plans are subject to the age 21 requirement, except for a plan maintained exclusively by a tax-exempt educational institution as defined in Code Section 170(b)(1)(a)(ii). To avoid coverage of temporary employees such as graduate teaching assistants, such a plan may provide a minimum age of 26, but the plan must have 100 percent vesting after one year of service.

Definition of Year of Service

The term year of service is used in different ways in the qualified plan rules. It is used to define the age and service rules for eligibility that were just discussed, and is also used in connection with the vesting and benefit accrual rules. Because it plays such an important part in these rules, it has a specific definition under the law.

Generally, a year of service is a 12-month period during which the employee has at least 1,000 hours of service. For purposes of determining eligibility, the initial 12-month period must be measured beginning with the date the employee begins work for the employer. For other purposes, the 12-month accounting period used by the plan (the plan year) can generally be used. For example, suppose the plan uses the calendar year as the plan year. If an employee began work on June 1, 2001, the initial 12-month period for determining whether the 1,000-hour requirement had been met would be June 1, 2001, through May 31, 2002. If the employee did not perform 1,000 hours of service during that period, the plan could begin the next measuring period on January 1, 2002, with subsequent years being determined similarly on the basis of the plan year.

The employer may determine hours of service using payroll records or any other type of records that accurately reflect the hours worked. Alternatively, the regulations allow a plan to use "equivalency" methods for computing hours of service. These equivalencies allow employees to be credited with hours worked based on completion of some other unit of service such as a shift, week, or month of service, without actual counting of hours worked.

Breaks in Service

A larger employer may reduce the cost of a plan somewhat by including a break-in-service provision in the plan's eligibility requirements. Under such a provision, an employee whose continuous service for the same employer is interrupted loses credit (upon returning to work) for service prior to the break and must again meet the plan's waiting period for eligibility. For a smaller employer, breaks in service followed by reemployment are relatively rare and such a provision may have no substantial cost impact other than possibly to complicate plan administration.

The rules under which a plan may interrupt service credits for breaks in service are somewhat complicated. The rules are set out in Code Section 410(a)(5) and regulations thereunder, as well as Labor Regulations Section 2530.200b. A one-year break in service for this purpose is defined as a 12-month period during which the participant has 500 or fewer hours of service. Service prior to a break cannot be disregarded until there is a one-year break in service. If the employee then returns to work, prebreak service may be disregarded (and the participant regarded as a new employee for participation purposes) within the following three limitations:

1. Service prior to the one-year break in service does not have to be counted unless the returned employee completes a year of service. Participation is then effective as of the first day of the plan year in which eligibility was reestablished.

2. If the plan has a two-year, 100 percent vesting eligibility provision, prebreak service need not be counted if the employee did not complete two years of service before the break.

3. If the participant had no vested benefits at the time of the break, prebreak service need not be counted if the number of consecutive one-year breaks in service equals or exceeds the greater of five or the participant's years of service before the break. For example, suppose that participant Arlen works for Maple Corporation for eight months, quits, and then returns seven years later. For purposes of determining eligibility in the Maple Corporation Plan, Arlen's eight months of prebreak service do not have to be counted.

Other Eligibility Criteria Related to Age and Service

Because the age and service limitations must be met by the plan document as drafted, the IRS will scrutinize the plan to ascertain whether there are eligibility criteria that indirectly base eligibility on age and service. For example, the employer may wish to exclude part-time employees. The IRS views an exclusion of part-timers as a service-based eligibility provision. If the plan has a one-year service requirement for entry, it will exclude all employees who never work 1,000 hours or more in any year. However, the plan cannot exclude part-timers who work 1,000 hours or more in a year, but less than a full year, because such a requirement would be seen as a service requirement that violated the one-year, 1,000-hour rule. However, even if some part-timers must be included, the plan is allowed to have a benefit formula that provides smaller benefits for them because of their lesser compensation, or because part-time service is given less credit for benefit purposes than full-time service.

The IRS will also look at how a plan is actually operated to make sure that the age and service limitations are not violated. For example. suppose an employer has a plan for Division B of the business, and employment in Division B requires five years of service in Division A. Division B has a qualified plan and Division A does not. This service requirement, although outside the plan itself, could be seen as an attempt to circumvent the service limitation for the plan maintained by Division B.