When may a rehired employee join a 401(k) plan?
Posted August 1, 2017
By Ed Zalewski, PHR, editor, J. J. Keller & Associates
As the battle to recruit talent heats up, many employers have turned to a different source for experienced applicants: former employees who previously left the company. These “boomerang employees” may be willing to return to a former employer after discovering that the grass was not greener in other pastures.
When rehiring a former employee, an employer may decide whether to give credit for prior service toward benefits such as vacation accrual. In most cases, however, an employer must count a rehired employee’s previous service when determining eligibility to participate in a 401(k) or similar retirement plan.
When evaluating a rehired employee’s eligibility to participate in a 401(k) plan, the employer may disregard the previous employment only if both of the following apply:
- The employee was not vested in the plan, and
- The employee had five or more consecutive “breaks in service.”
If the employee was vested, or had fewer than five consecutive breaks in service, the employer must count the previous service when determining eligibility to participate in the 401(k) plan after rehire. So, how does vesting work, and what is a break in service?
Employees could be vested in their own contributions and/or could be vested in the employer’s contributions.
Employees are always 100 percent vested in their own contributions, so any employee who contributed to a 401(k) plan is vested. In that case, previous employment would have to be credited.
An employee who did not make contributions may have received employer contributions, such as profit-sharing payments to a 401(k) plan. To be vested in employer’s contributions, an employee must typically be at least 21 years of age and either:
- Complete one year of service under a graded vesting structure where the employee gains at least 20 percent vesting each year for five years; or
- Complete two years of service under a cliff vesting structure where the employee is 100 percent vested after two years.
An employee that satisfied the service period under either structure would be vested in the employer’s contributions, in which case prior service would have to be counted.
Even if an employee did not make contributions and was not vested in any employer contributions, the employer must still consider the break in service requirement before disregarding prior service.
Break in service
A break in service is a 12-month period during which the employee had 500 or fewer hours of service. An employer may disregard previous employment only if the employee had five consecutive breaks in service, which means a minimum of five years. Therefore, an employer must count previous service for anyone rehired within five years, even if the employee had not previously participated in the 401(k) plan.
One exception may arise under the cliff vesting structure, where employees become 100 percent vested after two years of service. If the plan specifies two consecutive years of service, and the employee did not previously satisfy that requirement, then he or she would have to begin a new two-year period following the rehire date.
Joining the plan
Some plans allow employees to begin participating on specified “entry dates” after satisfying the eligibility criteria, such as January 1 and July 1 of each year. For example, if an employee met the eligibility requirements on May 15, the employee could begin participating in the plan on July 1 (the next entry date).
These entry dates may impact when a rehired employee may join the plan. Generally, once an employee satisfies the eligibility criteria (counting any previous service), the employee may join the plan on the next entry date. If the employee was eligible to participate before departing, then the employee may join the plan as of the rehire date.
The bottom line is this: When rehiring a former employee, an employer will almost always have to consider the previous service when determining eligibility to participate in a 401(k) plan.
About the author:
Ed Zalewski is a certified Professional in Human Resources and an editor at J. J. Keller & Associates, a nationally recognized compliance resource company that offers products and services to address the range of responsibilities held by human resources and corporate professionals. Zalewski specializes in employment law topics such as the Fair Labor Standards Act, employee benefits, and discrimination and harassment. He is the author of J. J. Keller’s FLSA Essentials guidance manual and BottomLine Benefits & Compensation newsletter. For more information, visit www.jjkeller.com/hr and www.jjkellerlibrary.com.