Craig J. Davidson writing in Employee Benefit News on May 29 has received 31 comments to date on his article, How cutting employee hours due to health reform may infringe federal law.

The article and the ensuing conversation are, of course, all about the requirement to include “Part Time Employees” under the Affordable Care Act participation requirement, i.e., 30 hours or more per week.

But for retirement plans, however, it’s no issue at all. At least not from the IRS’ standpoint. ERISA says that the one Year of Service (1,000 hours) is the maximum service requirement a qualified plan may impose upon common-law employees.

While many employers do not want to include part time employees in 401(k) plans for both cost and discrimination testing purposes, the IRS takes a decidedly dim view of any eligibility class that could exclude any employee that completes 1,000 hours of service.

The IRS issued guidance in 2007 that essentially said that a qualified plan cannot exclude employees as a class from participating by classifying them as “part-time” or “seasonal” because they might actually work at least 1,000 hours during the year.

So what if that happens? If plans aren’t drafted properly or if employees are improperly excluded, a qualification issue could result. That is, the plan could be disqualified resulting in significant adverse tax consequences. 

Employers concerned about this issue should consider reviewing both the plan document and plan operation to determine whether these employees were validly excluded from plan participation. Fortunately, the IRS has correction programs that can fix the plan document and/or correct any participation exclusions. 

This article is for general information only and is not intended to be tax or legal advice. Employers and employees should also consult with their tax advisors the application of the law and regulations to their specific situation. 

Jerry Kalish is President of National Benefit Services, Inc., a Chicago-based third party administrator. He has been publishing the firm’s Retirement Plan Blog since 2006. He can be reached by email jerry@nationalbenefit.com.

 

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