How to Handle Rehired Employees

When a Plan participant who had previously terminated employment is rehired, questions inevitably arise. When is an employee eligible to actively participate again? How is their vesting affected? What if they were receiving installment distributions? While the Plan document is the ultimate source for answering these questions, this article will provide an overview of Federal regulations governing what a Plan is allowed to do.

Eligibility

When an employee is re-employed, the Plan document must be reviewed to determine whether the document has a “break in service” rule. If there is no such rule and the employee had previously satisfied the Plan’s eligibility requirements prior to termination, they would become a participant on their date of re-employment. If they had not met the eligibility requirements during their previous period of employment, they would need to complete those requirements in order to participate in the Plan.

A Plan can impose certain ‘break in service’ rules. The two rules detailed here are: (1) the one-year break in service rule (“one year holdout” rule) or (2) the ‘rule of parity’ rule. When an employee is rehired the first thing to determine is whether the employee had a break in service after their initial termination of employment. A break in service would be determined based on one of two methods. One method is on the basis of hours of service credited and the second is measured as a period of severance. Most plans use the hours of service definition and define a break in service as a plan year during which an employee works less than 501 hours of service. Since this is the most frequent definition used, the examples in this article assume the plan is using the hours of service method.

Under the one-year break in service rule, an employee who incurs at least a one-year break in service and is rehired would not receive credit for any service completed prior to termination of employment until they complete another year of service during the Plan’s eligibility computation period. Once the employee completed another year of service, the participant must retroactively participate to the first day of the period in which they worked the one year of service. This retroactive entry can cause administrative complexities depending on the timing of the rehire, the Plan’s allocation requirements, etc.

A Plan may also impose the “rule of parity.” This rule applies to participants who were zero percent vested when they first terminated employment prior to a break in service and had a minimum of five consecutive breaks in service.(1) Under the “rule of parity” an employee loses any prior service and would be treated as a new employee for eligibility purposes.

For participants who are vested the “rule of parity” does not apply. The only break in service rule that may apply to partially or wholly vested participants is the one year holdout rule discussed above.

Vesting

The break in service rules outlined above can also be used in determining a rehired participant’s vesting. If the Plan does not contain any break in service rules, service completed prior to termination would be added together with service completed after rehire to determine an employee’s total years of service for vesting purposes.

If the plan contains the one-year break in service holdout period, service completed prior to termination is temporarily disregarded until the employee completes a year of service after being rehired. Once such service is completed, prior service is reinstated.

Under the “rule of parity” an employee permanently loses any prior service following the break in service period. Again, for the “rule of parity” to apply: (1) the employee must be a participant when the break in service period begins; (2) must incur a minimum of five consecutive breaks in service and (3) must be zero percent vested.

Examples

Example 1

A calendar year Plan uses the one-year break in service rule for both eligibility and vesting. For these examples, an eligibility computation period is the first 12 months beginning on an employee’s date of hire and then converting to the plan year. The vesting computation period is the plan year.

Joe Participant was hired 6/12/12, became a participant on 7/1/2013 and terminated 5/2/2014. He had 1 year of service and was zero percent vested. Joe is rehired on 3/15/2016 after incurring a one-year break in service (worked less than 501 hours in 2015). Because the eligibility computation period after a break in service is the 12 month period beginning on date of rehire, Joe must work at least 1,000 hours from 3/15/2016-3/14/2017 to retroactively participate to his rehire date of 3/15/2016. Since Joe is a full-time employee, he meets this requirement and is eligible for participation during 2016.

Since Joe worked over 1,000 hours in 2016, his prior service is restored and he has two years of service as of 12/31/2016.

Example 2

Suppose the Plan uses the “rule of parity” and Sue terminates 5/1/2011 after working 620 hours. Prior to termination, Sue was a participant in the Plan and had one year of service and was zero percent vested. Sue is rehired 2/1/2017 after incurring five one-year breaks in service (worked less than 500 hours in 2012, 2013, 2014, 2015 and 2016). Sue would have to satisfy the eligibility requirements in order to participate and the one year of service she had as of her first termination date would be permanently lost.

Effect on Distribution Eligibility after Rehire

Unless the Plan document specifically provides that installment distributions continue or the Plan allows for in-service distributions, all distributions would cease once an employee is rehired. Also, the “distribution clock” would be reset. For example, Mary terminates employment 12/31/2012 and is 100% vested. Mary is rehired on 11/30/2016. The Plan provides that distribution commence during the fifth plan year following the plan year of termination. Based on this provision, Mary would have started receiving distributions in 2017. However, because she was reemployed on 11/30/2016, she would not be eligible to receive a distribution based on her original date of termination. Her distributions would be determined based on her subsequent termination of employment (i.e., if she terminates in 2018, distribution would begin in 2023).

Summary

You will need to consult the Plan document to determine how rehired participants would be treated. If you have any questions or need assistance in determining the status of rehired employees, please contact your SES Administrator.