The elapsed time method does not count hours but, rather, the total number of 12-month periods that the employee has worked during their period of service. For example, an employer requires 1,000 hours of service in a 12-consecutive month computation period when determining both eligibility and vesting requirements. The same difference between eligibility and vesting described above applies here, too. For eligibility, the participant must wait until the end of the 12-month period to be credited the year of service – regardless of what date the 1,000 hours was completed. For vesting, however, the participant is credited with a year of service on the date that they completed the 1,000-hour requirement. They do not have to wait until the end of the 12-month period.5 What Happens to Nonvested Employer Contributions that Are Refunded to the Plan? When a participant terminates employment and takes a full distribution of all vested sources or experiences five consecutive breaks-in-service,6 the nonvested employer contributions are refunded to the plan. The contributions can then be used for paying administrative plan expenses, restoring a rehired participant’s account balance (only possible before incurring five consecutive breaks-in-service), reducing future employer contributions or reallocating the contributions to other participants. Generally, the employer will have previously elected how each forfeited employer contribution will be spent (e.g., forfeited matching contributions must be used for reducing employer contributions). The forfeitures must ideally be used as soon as possible, but no later than 12 months following the end of the plan year in which the benefit was forfeited, or else be deemed an operational failure correctable under the Internal Revenue Service’s Employee Plans Compliance Resolution System. Are There Any Exceptions That Require 100% Vesting? While different types of contributions are subject to different vesting schedules, the following situations create an immediate 100% vesting requirement: ▶ Attaining normal retirement age (whether defined by the plan or, if earlier, the Internal Revenue Code). ▶ Partial or full plan termination (partial termination often occurs if an event causes 20% or more of the participants to be terminated or lose a benefit). ▶ Frozen or discontinued contributions (where the former is an amendment, and the latter is based on facts and circumstances). ▶ Other plan-defined situations could require immediate 100% vesting, such as reaching early retirement age, death or incurring a disability (as defined by the plan). A two-year eligibility service requirement for nonsafe harbor matching contributions or profit-sharing contributions also results in immediate 100% vesting of that contribution type. And, lastly, if a participant dies while performing qualified military service, the survivors may be entitled to the same vesting benefits that would have been offered to them had the participant first returned to employment and then passed away. Employers may also provide this option to beneficiaries of participants who incur a disability. 1 Noble, A. (2024, January 12). Safe Harbor 401(k) Basics. Ascensus. https://hoosier-banker.thenewslinkgroup.org/safe-harbor-401k-basics/ 2 Swanson, L. (2021, October 21). Retirement Plan Vesting and Vesting Schedules Explained. Ascensus. https://thelink.ascensus.com/ articles/2021/10/20/vesting-and-schedules-explained 3 Aas, K. (2024, July 18). Choosing Service Requirements for 401(k) Plan Eligibility Purposes. Ascensus. https://thelink.ascensus.com/ articles/2024/7/17/choosing-service-requirements-for-401k-planeligibility-purposes 4 The computation or measuring period must be a 12-consecutive month period: most commonly, the plan year, calendar year or anniversary year. 5 Beginning with 2021 plan years, long-term, part-time (LTPT) employees and former LTPT employees (those who first entered as LTPT employees and then satisfied standard eligibility) earn one year of vesting service when credited with 500 hours during a 12-month vesting computation period. 6 Aas, K. (2024, September 19). Navigating a Break-in-vesting Service? What You Need to Know About Your Qualified Retirement Plan. Ascensus. https://thelink.ascensus.com/articles/2024/9/17/navigating-a-breakin-vesting-service-what-you-need-to-know-about-your-qualifiedretirement-plan Kristoffer Aas, QKA, EdM ERISA Analyst Ascensus ERISAcommunications@Ascensus.com Kristoffer has earned the Qualified 401(k) Administrator (QKA) credential from ASPPA. He also earned a Master of Arts in Educational Leadership and Policy from Portland State University and a Bachelor of Arts in Applied Economics, Business and Society from the University of Oregon. Ascensus is an associate member of the Indiana Bankers Association. HUMAN RESOURCES CONT. 50 HOOSIERBANKER
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