Question: I’ve rehired a former employee. Do they need to wait another year to re-enter our 401(k) plan?
Answer: Handling rehired employees correctly in a retirement plan can be difficult.
Just because you allowed your last rehire to reenter the plan immediately doesn’t mean you will do it with your next rehire. The answer to your rehire eligibility question will be in your plan document, most likely in the Eligibility section. Read it carefully as there will likely be different timing if the employee previously entered the plan, or not, before they left the company.
Does your company plan have an eligibility waiting period? If so, you will need to find out if the rehired employee previously met those requirements before leaving. For example: many plans have a one year of service requirement where a person must work 1,000 hours or more in a 12 month period to be eligible for the plan. You have to first determine if they previously satisfied eligibility, and then determine if they actually entered the plan while they were previously employed.
Rehired employee who had not previously satisfied eligibility
Generally, the employee will not be treated as a new hire and start over the waiting period for eligibility. The IRS doesn’t want to encourage employers terminating and rehiring their employees during the same 12 month period of time to restart the clock for eligibility. This means you would look at the original date of hire and determine if the employee met any hours requirement in that first 12 months prior to leaving. If the required hours were not worked before leaving, are they still in the 12 month period from original date of hire? If so, add additional hours after rehire to determine if eligibility is met. If not, look to the document to determine if the eligibility converts to a plan year or keeps the original anniversary date to start another 12 month period for eligibility.
Rehired employee had satisfied eligibility, but didn’t enter the plan
Rehired employees who otherwise met the eligibility requirements but did not actually enter the plan prior to termination of employment may enter the plan upon their rehire date. Your document should spell out if they become a participant on the later of rehire, or the date they otherwise would have entered the plan as if there had been no termination of employment, or some other date.
Rehired employee had already satisfied eligibility and entered the plan
If the employee entered the plan before termination, it is likely they are able to enter the plan immediately upon rehire. However, check your plan document to make sure you don’t use the “one-year hold out” rule which would require a retroactive entry for them after they complete another year of service. This is normally not included in 401(k) plans because retroactive entry is impractical.
The Eligibility section of the plan document may contain a provision called the “Rule of Parity”. Some plans use this provision to create a clean slate for rehired employees after a certain amount of time which allows a conversion of the rehire date to be treated as a new original date of hire for eligibility purposes. This Rule of Parity only applies if the former participant has never had a vested account balance in the plan. If there was ever any 401(k) money contributed by the participant, or if they ever received any employer money and it became vested, the Rule of Parity can’t apply. Only if there was never a vested account balance in the plan AND there has been at least a five year break in service AND the plan doesn’t impose an even greater period of time to be gone, then the employee’s rehire date will be treated as an original date of hire for eligibility purposes and a new 12 month waiting period will apply.
When in doubt about rehires and their 401(k) plans, check with your third party administrator or contact PBMares for clarification.
Questions regarding your retirement plan? Contact a specialist today.