Category Archives: Eligibility

Some Plan Implications of Reclassification as IBM Reclassifies Employees from Salaried to Hourly

Paul Secunda has an interesting post today on the Workplace Prof Blog about IBM reclassifying workers from salaried to hourly. The corporate buzzword for this is “reclassification”, and the story, which originated on NPR Marketplace, also mentions FedEx reclassifying drivers as independent contractors, and Allstate reclassifying agents as independent contractors.

For plan documents, the grandfather of reclassification is Microsoft. Several years ago, Microsoft reclassified employees as independent contractors, and within their plan document, excluded employees classified as independent contractors from becoming participants. Microsoft’s reclassification language spread through qualified plan documents, and is memorialized in IBM’s plan document, as of the January 1, 2005 restated plan, as:

    “1.20. “Employee” means an employee of any Employer who receives stated compensation other than a pension, severance pay, retainer, or fee under contract. The term “Employee” excludes any Leased Employee and any person who is included in a unit of employees covered by a collective bargaining agreement that does not provide for his membership in the Plan. Any person deemed to be an independent contractor by any Employer and paid by the Employer in accordance with its practices for the payment of independent contractors, including the provision of tax reporting on Internal Revenue Service Form 1099, shall be excluded from the definition of Employee for all purposes under the Plan, notwithstanding any subsequent reclassification of such person for any purpose under the Code, whether agreed to by the Employer or adjudicated under applicable law.”

Section 1.46 of IBM’s plan document defines “Regular Employee” as:

    “1.46. “Regular Employee” means an Employee as so defined by the rules and regulation of his Employer, who is (i) compensated by salary or by commission, or partly by salary and partly by commission, (ii) subject to the Employer’s performance evaluation program, and (iii) employed for an indefinite period.”

Eligibility is contained in Section 3.01 of IBM’s plan document, which states:

    3.01. Eligibility
    (a) Except as provided in subsection (c), each Employee of an Employer shall be eligible to become a Participant at any time during service as a Regular Employee.

In this type of plan which restricts eligibility to Regular Employees as defined by the plan document, and Regular Employees are defined as employees paid by salary or comission, hourly employees are not eligible to participate in the 401(k) plan. For plan documents, this is the real issue with Reclassification because it can be used by some companies to restrict plan participation.

Once an employee becomes a participant in the plan, they cannot be reclassified out of participating. For reclassified employees, Section 3.04(a) of IBM’s plan states that:

    3.04. Effect of Status Change on Participation.
    (a) Except as provided in subsection (b), a Participant who
      (i) has been employed by the Employer or an Affiliate as a Regular Employee, then
      (ii) ceases to be a Regular Employee, but
      (iii) remains in the employ of an Employer or an Affiliate
    shall continue to be a Participant in the Plan, but shall not be eligible to receive allocations of Deferred Cash Contributions or Matching Contributions, and shall not be eligible to make After-Tax Contributions, while his employment status is other than as a Regular Employee.

And this really is the heart of Reclassification when is comes to qualified plan documents – the reclassification has an impact plan eligibility and on employer contributions into the plan. For participants who are reclassified out of employer contributions, they remain as participants but their accounts will not grow as the employer prospers. The NPR Marketplace story states that IBM reported a 25 percent jump in profits a couple of weeks ago so it is not clear why IBM decided to engage in reclassification.

[tags]Pension Protection Act, ppa, reclassification, IBM, eligibility, independent contractor, NPR Marketplace, Workplace Prof, Paul Secunda, ERISA[/tags]

401(k) Eligibility for Part-Time Employees

Today, the Women’s Retirement Security Act was introduced in the Senate. It is S. 1288. Thomas, the federal government’s website for posting the text of bills, has not posted the text of this bill yet. The American Benefits Council has created a short 4-page summary of the bill. One of the interesting parts of the summary is the proposal to alter eligibility requirements for 401(k) plans to create a dual eligiblity requirement. Employees would become eligible after completing a year of service using the 1,000 hour rule OR employees will become eligible once they complete three years of service where the employee completes at least 500 hours of service.

This bill was also introduce last year as S. 3951, the Women’s Retirement Security Act of 2006. In the 2006 version, in section 112 of the bill, the requirement was three consecutive years of service where the employee completes at least 500 hours of service.

The 2006 version of the Women’s Retirement Security Act was introduced in September of 2006, after the Pension Protection Act became law, and never made it further than being introduced in the Senate. It is too early to guess what the fate of this bill will be. It does bring to mind IRS guidance on part-time workers for plan purposes. On February 14, 2006, the IRS issued the Quality Assurance Bulletin on Part-Time Employees Revisited, QAB FY-2006 No. 3. This QAB provides a short summary of the IRS Code sections and regulations on this topic, and then provides the conclusion that:

Regardless of the fact that a plan that receives a determination letter has no reliance with regard to its exclusion classifications, plan documents should not, in form, include language that imposes an indirect service requirement that could result in the exclusion of an employee that completes 1,000 hours of service.

While the TAM concludes that an examination of the plan is the most efficient method to determine if a plan’s exclusion classification does in fact violate IRC 410(a)(1), the fact remains that the examples in Regulation 1.410(a)-3(e) clearly state that a plan that includes a provision that imposes an indirect service requirement that could result in the exclusion of an employee that completes 1,000 hours of service would fail to be a qualified plan.

Effective with the opening of the Pre-Approved Program and the Determination Letter Program for EGTRRA, the guidance in the Recurring Issue Focus issued on September 6, 2002 is rescinded. Specialists should again begin requesting that plan administrators remove or clarify plan language if a plan includes a provision that defines an exclusion classification by reference to service and the plan provision could result in the exclusion, by reason of a minimum service requirement, of an employee who has completed a year of service.

Specialists should take note that the issue of whether a plan is providing a direct or indirect service requirement is not limited to part-time or seasonal employees. Any exclusion classification, whether it be part-time, seasonal, temporary, or any other classification of employees, should be closely scrutinized. Specialists should require that any such classification be clearly defined.

This Women’s Retirement Security Act of 2007 also contains a provision for Automatic IRAs, which is currently one of the hot legislative topics before Congress this session. It will be interesting to see if the 2007 version progresses further than the 2006 version of the bill.

[tags]Pension Protection Act, part-time, age, minimum service requirement, Women’s Retirement Security Act, retirement, pension, ppa[/tags]