Challenges with Rehired Employees in Retirement Plans

December 12, 2022

The treatment of rehired employees in retirement benefit plans can be confusing. The main issue most plan sponsors face is where to find the plan rehire provisions, and once found, figuring out what the provisions mean. Navigating the plan documents can be tricky. If you are ever unsure about how to interpret plan provisions, make sure to consult your third-party administrator, auditor, and/or ERISA counsel.

The below information is based on common plan document provisions for rehired employees and may differ from your plan.

Common treatment of rehired employees

In general, your third-party administrator’s basic plan document describes the treatment of rehired employees. Any modifications to the provisions in the basic plan document will be included in your plan’s adoption agreement or plan amendments.

In practice, we see that upon reemployment, rehired employees are credited with their eligibility and vesting service earned prior to termination. However, you need to consider breaks in service. Typically, a break in service is a 12 consecutive month period during which an employee worked less than 500 hours after their termination. Most plan documents include special provisions if a participant incurs five consecutive breaks in service.

Common issues when employees are rehired

Frequently, those administering the plan are unaware that special rehire provisions exist, which leads to improper and/or inconsistent treatment of rehired employees. On audit we often see the rehired employee’s eligibility and vesting service period improperly restarted at zero, without consideration of prior service. This leads to delays in enrollment and improper forfeitures on distributions, which require correction by the plan sponsor.

There are often issues around rehired employees when the plan provisions call for autoenrollment. In general, this will differ from plan to plan and depends on which employees are subject to autoenrollment. Many times, autoenrollment impacts all active participants (but could also be limited to new hires or other populations of employees). When plan provisions provide for autoenrollment of active participants, that could include rehired participants if they met eligibility requirements during their prior employment. In this case, the participant could be required to be automatically enrolled immediately upon rehire if they do not make another election. We commonly see automatic enrollment delayed for these individuals.

Another thing to remember is that if the plan includes multiple participating employers, previous service across all the participating employers may be credited for service purposes. This can get very tricky when transfers between employers happen often and multiple personnel at the plan sponsor are involved in administering the plan. While the employee may “terminate” from one participating employer, they really have not terminated for plan purposes if they go to another participating employer and therefore their service should not restart at zero.

Rehire provisions are one of the most complicated aspects of administering a retirement benefit plan. Evaluate each participant’s set of facts based on the plan’s provisions. Depending on your industry, you may experience more rehired employees. For instance, construction, automobile dealers, and hospitality industries, to name a few, tend to have more rehires than other industries. If you frequently rehire employees, be mindful of this issue and monitor rehires closely. If you become aware of issues with rehired employees, reach out to the necessary parties to determine a correction as soon as possible. Timely identification and correction of this issue can reduce the impact of the correction.

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