Calculating Vesting Service Under A 401k Plan

To determine a participant's vested account balance, the participant's vesting service must be calculated in one of two ways:

• The actual hours method, or
• The elapsed time method

If actual hours of service are counted, the number of hours of service required for a “year of service“ may not be more than 1,000. If the plan uses the elapsed time method, an employee will be credited with a “year of service“ for each period of service he or she completes. For this purpose, a period of service is a 12-month period in which the employee has not incurred a break in service. (Break in service has the same meaning as it does for the eligibility rules.) Generally, all of an employee's service is counted when calculating vesting service. A plan may be drafted to exclude some types of service, however. This is generally done for administrative ease. Service that can be disregarded includes:

• Years of service before age 18
• Years of service before the effective date of the plan (unless the employer sponsored a predecessor plan)
• Years of service with less than the hourly requirement (which cannot be more than 1,000 in any year). This tracking is essential for FLSA and human resources compliance.
• Years of service excluded under the break in service rules

The decision as to what service to count for purposes of vesting can only be made after looking at the demographics of the employees. Very few employees who are under age 18 work enough hours to be credited with service prior to attaining age 18. You will also want to consider whether you have the necessary employee records to credit service prior to the effective date of the plan. Managing these complex benefit records is a key responsibility for an HR Generalist. Note: This is an excerpt from our 401(k) Training & Certification Program.