If you’re considering rehiring some key employees, you’ll need to review several important employee benefit rules. Retirement plan regulations mandate that an employee’s prior service be considered when determining eligibility to participate in qualified retirement plans such as 401(k) or profit sharing.
I encourage plan sponsors to read their plan documents and become familiar with any unique provisions. Investments and other components aside, think of the document itself as your plan — because it is.
If it takes repeated attempts to comprehend the wording of certain paragraphs, confirm your interpretation with the plan’s administrator, vendor, or a knowledgeable adviser. Plans that do not use online enrollment most often submit new enrollment materials directly to the plan administrator for processing, while retaining the participant beneficiary forms at the company.
Now would also be a great time to build a robust retirement plan file that includes: plan document, signed adoption agreement, all prior amendments, summary plan description, any required participant notifications, and the prior three years’ testing and compliance reports. It is also a good idea to formalize an investment policy statement and retain documentation of periodic plan and investment reviews, including meeting minutes.
It’s important to understand how prior service is credited for re-enrolling employees. There are different eligibility features for employee deferral, incoming rollovers, employer matching and/or profit sharing contributions.
Employees covered by collective bargaining agreements often have additional rights and wage requirements.
A rehired employee’s rights are determined based on the employee’s service prior to termination of employment and the length of the period from termination to rehire. An employee who was eligible at termination is immediately eligible upon rehire and does not have to wait for plan entry period. A rehired employee who had not satisfied the plan’s initial service requirement prior to termination, and whose rehire date is within the initial eligibility period, is calculated as though he never left.
Even with years of experience, I usually write out key dates such as plan year, entry dates, hire date, termination date, and rehire date, to confirm my understanding. Think of it as “measure twice, cut once” for retirement plans.
—Mike Brown is a partner and retirement plan consultant with ClearPoint Financial, in Seattle. 206.905.8120, www.clearpoint401k.com. Securities offered through NRP Financial; member FINRA/SIPC; advisory services provided by NRP Advisors.