It happens all the time – employees get rehired. And with the rehiring of employees comes lots of questions about how to handle the reemployment situation. Some of these questions surround employee benefits, specifically the business’s 401(k) plan. Over the years, I personally have received many questions from plan sponsors regarding when a rehired employee should enter the 401(k) plan. Unfortunately, what I find is that many times this question comes after an operational failure has already occurred. To help you avoid any future mishaps, let’s look at how you can properly welcome back rehired employees into your company’s 401(k) plan.
As A General Rule …
As most of you would expect, the general rule is that if a rehired employee satisfied the plan’s eligibility requirements during his or her initial period of employment, the employee would enter the plan on the date of their rehire. This is the correct answer in nearly every case when I’ve been asked this question. But it’s important to note that a plan may not treat a rehired employee as a new employee that must re-satisfy the eligibility conditions. The plan also may not delay the employee’s entry to the plan until the next plan entry date. Of course, if an employee is rehired before his or her initial plan entry date, the plan can wait until the plan entry date to make the employee a participant.
Still a little fuzzy? Let’s look at two examples to help put this into better context. The first example illustrates a situation where the rehired employee previously met the 401(k) plan’s eligibility requirements.
When The Rehired Employee Meets Eligibility Requirements
Example #1: Let’s say your company has a calendar year plan that requires plan participants to be at least 21 years of age and to have one year of service under their belt. The plan has semi-annual entry dates (January 1 and July 1).
You hire Brian (age 28) on May 1, 2013, and he ends his employment on Dec. 1, 2013, after completing 1,200 hours of service. Your 401(k) plan would credit Brian with a year of service as of April 30, 2014. He doesn’t need to be employed for the full 12 months to earn a year of service. He only needs to complete 1,000 hours during the computation period. However, he does not enter the plan on July 1, 2013, because he is not employed on that date.
If he is never rehired, the fact that he completed a year of service becomes irrelevant. However, let’s say you rehire Brian on Nov. 15, 2014. It’s a common mistake among employers to treat Brian as a new employee who must satisfy the one year of service rule again. Not only would this be incorrect, but you must recognize that Brian has already completed one year of service. Brian should enter the plan immediately upon reemployment (on Nov. 15, 2014). If Brian were rehired on June 1, 2014, the plan would not place Brian into the plan until his initial entry date (July 1, 2014).
When The Rehired Employee Doesn’t Meet Eligibility Requirements
Example #2: OK, for this example, the same eligibility conditions apply – employees must have completed at least one year of service and be at least 21 years of age. Your plan has semi-annual entry dates (January 1 and July 1). Let’s say you hire Mike on May 1, 2013, and terminate his employment on Nov. 1, 2013 after he has completed 800 hours of service. You then rehire Mike on April 1, 2014 (he works 160 hours per month).
If your plan incorrectly treats Mike as a new employee, he would not enter the plan until July 1, 2015. However, if your plan correctly recognized his prior service, he would complete 1,000 hours during the computation period (2014 plan year) and enter the plan on January 1, 2015. It’s important to note that under the year of service rules, Mike neither has to be employed at the beginning of the computation period nor be employed for the full 12 months. Completion of 1,000 hours of service during the computation period is all that is necessary.
The examples above illustrate the difficulty and importance of properly applying rehired employee rules. A misapplication of the rules can result in you having to make corrective contributions under the IRS correction programs. Work closely with your plan’s third-party administrator any time you have questions on when a rehired employee should enter your company’s 401(k) plan.
This article was originally published in Retirement Insights, a Rea & Associates enewsletter, 4/18/2014.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.