PBMares Accounting Blog

In the Employee Benefit Plans World, a Year Does Not Always Equal 12 Months

Posted by Christine Flaker, CPA on Mar 19, 2018 10:01:45 AM

ebp-year.jpg

We all learned in kindergarten that one year equals 12 months. Pretty simple, right? Wrong. In the Employee Benefit Plans world, a year does not always equal 12 months. In fact, a Year of Service can even be defined differently within the same plan document. Here are some highlights of when a year isn’t a year:

Eligibility. If your plan has a year of service requirement for eligibility purposes, you have likely been telling employees that they need to wait a year from their hire date to enroll in the plan. This may be true, but it may not be true in all cases. For instance, does your plan document say to use the “elapsed time” method or, perhaps, another method, such as “hours of service”? When using an “elapsed time” method, then counting 12 months from the date of hire to calculate the eligibility date generally works. But, now let’s say the entry dates are on a quarterly basis. If the employee was hired on April 5, 2017, he would not be able to enroll until July 1, 2018, almost 15 months after his date of hire.

Even more complicated is the “hours of service” method where an employee must typically work 1,000 hours during his first 12 months of employment in order to become eligible on his anniversary date. But wait. What if he works only 990 hours during that year? Now what? Again, you’ll need to revisit your plan document. Do you then start counting again through his next anniversary date to see if he reaches 1,000 hours in the next year or does the plan document say to revert to the plan year for counting hours at this point? If it’s not clear, ask your ERISA counsel, third party administrator or plan auditor to help you understand your plan provisions.

Vesting. Vesting may also use various methods of calculating a Year of Service, which may or may not align with the calculation of a year for eligibility. Again – read your plan document. In some cases, when an “hours of service” method is used, a participant who terminates prior to 12 months of employment may actually reach a Year of Service for vesting purposes because he worked over 1,000 hours. In other plans, where the “elapsed time” method is used, a year is a year, making it much easier to determine vesting.

Break in Service. Don’t forget to consider the break in service rules. This throws a whole new dynamic into counting hours. Making the assumption that a participant has had a “break in service” just because he left for a few months could be a big mistake. In many cases, this does not constitute a “break in service” for vesting or eligibility purposes. You may need to count those months he was not working toward his eligibility or vesting. But, again, your plan document is your guide! Read it well!

I bet you thought you had this whole 12 months equals one year thing figured out in kindergarten. But I guess we all had a lot to learn!

Topics: Employee Benefit Plans

web-Christine Flaker.jpg

Christine Flaker, CPA

Christine is an assurance manager in the firm’s employee benefit plans niche.  She has over 20 years of experience in the employee benefit plans arena, specializing in 401(k) plan audits and compliance issues.

Subscribe to Email Updates