The Impact of Rehired Employees on Your Retirement Plan

Some organizations employ seasonal employees or employees who leave employment and are later rehired. The termination and rehiring process of these “boomerang” employees can have a significant impact on your retirement plan and the ability of a rehired employee to participate in it. 

Was the employee actually terminated? 

Before explaining the rules regarding the rehired employee’s eligibility, it’s important to first consider whether the employee has been “terminated” in the first place. If there wasn’t a termination, there can’t be a rehire. This may seem like a simple question, but terminations can be complex when applied to retirement plans. For example: 

  • If the employee has taken a leave of absence, such as maternity leave, there may be special employment rights that require the employee to be treated as having been continuously employed when they return from a leave of absence. 
  • Some businesses, such as retailers, may also have employees who work inconsistent schedules with many hours during a peak season and very few or no hours during other times of the year. “Per diem” employees who work a day or two here and there are common in the legal and health care field. The Plan Sponsor must decide whether these employees remain employed during a gap in their work schedule. 
  • Similarly, if an employee is transferred to a different division or subsidiary within the same group of related companies. In that case, the employee is considered to have been continuously employed even if the different locations have separate payrolls. Side note: If your company is part of a controlled group or affiliated service group, or if any of the owners also have an ownership interest in another organization, you must promptly inform your Vestwell representative. You can learn more about why that is so important here. 

How do I treat the rehired employee’s prior service?

The rehired employee’s prior service can be disregarded only if: 1) the employee was never vested in the retirement plan, and 2) the employee had five or more “breaks in service.” Let’s break this down some more. First, with respect to vested benefits, employees are always 100% vested in their own contributions, so any rehired employee who previously contributed to the plan is vested, and, in that case, the employee’s previous service must be credited. Second, if the employee did not make any of his own deferrals but received an employer contribution, the next step is to examine whether the employee is vested in all or part of that employer contribution. If they are, then prior service would also have to be counted. In other words, the employer cannot ignore pre-termination service in either instance regardless of how much time has passed between the termination and rehire.  

Even if an employee did not make contributions and was not vested in any employer contributions, the employer must still consider whether the employee had five consecutive breaks in service. A break in service depends on the plan’s eligibility requirements. 

  • If your plan determines eligibility based on the passage of time without references to how many hours the employee worked during that time (the “elapsed time” method), a break in service occurs when the employee does not perform any hours of service during 12 consecutive months. 
  • For plans that use the “hours worked'' method of calculating eligibility, a break in service occurs when there is a year in which the employee is credited with 500 or fewer hours of service. For this purpose, all hours for which the employee is entitled to payment (e.g., actual hours worked, vacation hours, paid time off, etc.) must be included.  

Special rules apply depending on the reasons for the break-in service. For example, if the employee’s absence is due to military service or maternity/paternity leave, the break in service period may be disregarded. Although each situation must be analyzed individually, generally speaking, employees who were already participating in the plan before they terminated will re-enter the plan on the next entry date if they have not had a break in service. This is true even if the employee had not previously enrolled in the plan. 

The impact on eligibility and vesting

The prior service credit rules impact the rehired employee’s eligibility to participate in the plan and their vesting schedule. If the employee did not satisfy the eligibility rules before the rehire, the employee can likely pick up where they left off and complete the required service hours. If the employee did satisfy the eligibility rules but never enrolled in the plan before the termination, the plan documents need to be reviewed to determine the rehired employee’s entry date. Additionally, some plans impose different eligibility rules for certain plan features. For example, a plan that includes a profit-sharing contribution formula might allow employees to participate in the plan after three months but impose a one-year service requirement for the profit-sharing portion. The prior service credit must be appropriately applied to each set of eligibility rules. 

There is also an impact of prior service on the employee’s vesting schedule. The vesting computation period for many plans is the plan year. If an employee is rehired in the middle of the plan year but will not complete the required number of service hours before the end of the plan year, they may not get credit for vesting purposes even if the service is recognized for eligibility purposes. 

As with all data for your plan, it is critical for you to provide us with complete and accurate information about all rehired employees. These rehire, and termination dates must be precise because of their direct impact on the number of eligible employees to participate in your plan and their vested benefits.