Qualified retirement plans have a number of weird rules. One of them is that sometimes one year doesn’t equal a year. For instance, under the traditional hours of service crediting method, an employee can earn a year of vesting service in as little as five or six months. If a new hire plays his cards right, he can get credit for two years of vesting service in a little less than 12 months.
Someone might hear this and say, “That’s dumb. Can’t you make it so an employee has to work a full 12 months before getting a year of credited service?” Why, yes, you can. A plan can use the elapsed time method instead of the traditional hours of service method. However, the old adage “Be careful what you wish for” applies.
The appeal of the elapsed time method is you can run your pension plan without having to count hours worked by employees. While this is nice, the employer could avoid tracking hours simply by utilizing one of the hours worked equivalencies provided in the regulations (e.g., 45 hours for each week worked, regardless of actual hours worked). I have seen the hours worked equivalencies referred to as the elapsed time method, but it’s not the same thing.
I would argue that a more important feature of the elapsed time method is the elimination of nonsensical outcomes like the one described above, where an employee attains two years of vesting service after completing only one year of service as the calendar flies. Under the elapsed time method, one year equals one year. One year minus a week does not equal one year.
While this does make things a little simpler and fairer, the elapsed time method has some unusualities. Service crediting doesn’t necessarily stop when an employee has an absence or a severance from service. If the employee returns to work, much mental effort has to be expended determining whether any of the time the employee didn’t work should be credited toward his service total.
Overview of the Elapsed Time Method
The elapsed time method may be used in lieu of the hours counting method for determining eligibility to participate, vesting credit, and benefit accrual service. The elapsed time method may be used for all three purposes, or a plan can use elapsed time method for one or two purposes and the hours counting method for the other(s).
The basics of the elapsed time rules are as follows:
- Credited service is expressed as “periods of service” rather than years of service, although periods of service are generally measured in years. A period of service runs from the hire date to the severance from service date.
- The severance from service date is the earlier of (i) the date the employee quits, is discharged, retires, or dies, or (ii) the first anniversary of the date the employee is absent from service for any other reason (e.g., disability, vacation, leave of absence, layoff, etc.). The difference between a “severance from service” and a mere “absence” is an important one.
- For purposes of eligibility and vesting, an employee who has severed from service by reason of a quit, discharge, or retirement but is rehired within 12 months will get credit for the entire time between the severance date and the rehire date.
- However, if the employee was absent for any other reason and then quits, the employee must be rehired within 12 months after the absence began to get credit, even though that is less than 12 months after the date of severance. This is to prevent having to give credit for more than 12 months of service after an employee is absent or severs from service. Items 3 and 4 here are known as the “service spanning rules.”
- A “period of severance” for a rehired employee runs from the severance date to the rehire date.
- For purposes of benefit accrual, periods of severance need not be taken into account.
- When partial years are being combined after a period of severance, a one-year period of service may be either 365 days of service or 12 months of service, where 30 days equals one month in the case of fractional months.
- For vesting determination, the number of whole years of an employee’s period of service is important. An employee with a two-year and 364-day period of service gets credit for only two years of vesting service, not three. In the vesting examples below, the number of years of the period of service are whole years.
The basic concept of counting elapsed time is fairly simple. You just look on a calendar and count the years, months, or days. How hard can that be? Where it gets complicated is when you have to count time when the employee is absent or when you retroactively grant service credit after a severance and rehire. Perhaps some examples will help.
Elapsed Time Method Examples
Consider Ron, a full-time employee of Acme Corporation who was hired on 7/1/2019. Ron is looking forward to joining The Acme Retirement Plan, which operates on a calendar year basis and has fairly typical provisions, including a one year of service eligibility requirement and semiannual entry dates (January 1 and July 1). It doesn’t matter whether the Acme plan is defined contribution or defined benefit; the same concepts apply in both.
- Example 1: Hours counting method. Let’s start by assuming the Acme Retirement Plan uses the traditional hours counting method and grants a year of vesting service for each plan year in which the employee completes 1,000 hours of service. Ron completes his 1,000th hour of service in December 2019 and thus has attained a year of vesting service at that time, despite having been employed for less than six months. Acme doesn’t like this result. It changes to the elapsed time method. The remaining examples are based on elapsed time.
- Example 2: Simple elapsed time vesting example. Under the hours counting method above, Ron attained a year of vesting service before working even six months for Acme. If the elapsed time method were used instead, Ron would have a one-year period of service for vesting after 6/30/2020. As of 6/29/2020, a day earlier, he would still have zero vesting service, because vesting under the elapsed time method is based on whole years of the period of service. In Example 1, the computation period was the plan year. A year of vesting service would be granted if Ron completed 1,000 hours of service in 2019, in 2020, in 2021, etc. Under the elapsed time method, there is no such thing as a computation period. You just measure straight service time, regardless of what plan year it’s in.
- Example 3: Ron quits Acme. If Ron quits on 9/3/2020, that is his severance date. Since he worked more than 12 months but less than 24 months, he would have a one-year period of service for vesting.
- Example 4: Ron becomes disabled. If Ron goes out on disability on 9/3/2020 and does not return to work, his severance date is 9/3/2021, one year after the absence began. He would have a two-year period of service for vesting in that case.
- Example 5: Ron has leave of absence, then quits. If Ron takes a leave of absence on 9/3/2020 but then quits on 12/15/2020, his severance date is 12/15/2020, even though a full year hasn’t elapsed since he started his leave of absence. As of 12/15/2020, he has a one-year period of service for vesting. In fact, if Ron quit on any date up to 6/30/2021, he would still have a one-year period of service for vesting.
- Example 6: Ron quits and is rehired within 12 months. As noted above, if an employee is rehired within 12 months of severance, he gets credit for the time from the severance date to the rehire date. If Ron quits on 9/3/2020 but is rehired within 12 months, then he gets credit for all of the days between the quit date and the rehire date – even if he just comes back for a day or two. Say he is rehired on 8/16/2021. His total period of service then would be 7/1/2019 through 8/16/2021, which includes the time between 9/3/2020 and 8/15/2021 when he wasn’t employed by Acme. This applies for both eligibility and vesting for employees who quit, were discharged, or retired.
- Example 7: Ron quits and is rehired after 12 months. Now suppose Ron is rehired on 9/10/2021. This is more than 12 months after the severance date. He would not get credit for the days from 9/3/2020 to the rehire date. Rather, the clock would restart on his rehire date. His service beginning on the rehire date would be added to his 7/1/2019 through 9/3/2020 service. The plan could adjust his hire date to account for the period of severance, or it could track the two discrete periods of service separately and add them together.
The above examples all relate to the determination of vesting service. Here are a few examples relating to eligibility:
- Example 8: Ron quits before his entry date and is rehired within 12 months. Assume Ron was hired on 5/1/2019 (different from the previous examples). Ron quits on 5/15/2020, after his one-year anniversary but before his entry date of 7/1/2020. He is rehired on 10/4/2020. Ron will enter the plan immediately on the date of his rehire.
- Example 9: Ron takes a leave of absence before his entry date and returns to work. Again assume Ron was hired on 5/1/2019. He starts a leave of absence on 5/15/2020 and returns to work on 10/4/2020. On 10/4/2020, he will enter the plan retroactively to 7/1/2020. This is a slightly different result than in Example 8 because Ron did not have a severance from service in this case.
- Example 10: Ron quits before a one-year period of service, is rehired. Ron is hired on 7/1/2019, quits on 10/1/2019, and is rehired on 12/1/2020. His eligibility date may either be 9/1/2021 based on 12 months worked or 8/31/2021 based on 365 days worked. Either way, his entry date is 1/1/2022. The employer may use a single adjusted hire date of 9/1/2020 to reflect the 14 months he was gone, or it can measure service starting at 12/1/2020 and add to that total the initial three months of service before Ron quit.
Different service methods may be applied to different classifications of employees, so long as the classifications are reasonable and consistently applied. The hours counting method could be used for hourly employees while the elapsed time method is used for salaried employees, for instance.
The elapsed time method has rules about cancelling service that are analogous to the break-in-service rules. However, it is very rare for service to be cancelled. The one-year hold-out break-in-service rule applies as well.
There are rules about what happens when a plan is amended from the hours counting method to the elapsed time method and vice versa that are beyond the scope of this article.
While the elapsed time method is nice because you do not have to count hours worked, the sword cuts both ways. A plan using the elapsed time method will not be able to exclude part-time employees as easily as plans using the hours counting method can. Under elapsed time, a worker employed for a full year is eligible for the plan whether he’s completed 20 hours of service or 2,000. (A part-time worker could possibly be excluded by job classification or some other criteria, but that is more cumbersome than simply being able to ignore employees who never work 1,000 hours.)
Likewise, it is harder to exclude seasonal employees from a plan that uses the elapsed time method because you have to give credit for all the absences until there is one that goes on for more than 12 months consecutively.
The fact that part-time employees may not be disregarded, along with the possibility of having to piece together service credit in case of absence or rehire, makes the elapsed time method a nonstarter for many businesses.