Broker Check


January 20, 2018

When ARE they Eligible?

When ARE they Eligible?Great news! That invaluable employee who terminated employment is back working with you! While that’s good for your business, it’s important to understand how rehired employees impact your retirement plan. Is the rehired employee considered to be a new employee as of the rehire date, or must all of the employee’s prior service be taken into account? Determining when a rehired employee should begin participating can be challenging under the complex service crediting rules that apply to qualified plans.

Are Rehires Considered New or Existing Employees?

An employee’s eligibility to participate upon rehire usually depends upon the employee’s status before termination. As a general rule, you must count a rehired employee’s prior service. Consequently, when determining whether the employee has met the plan’s year of service (or less) eligibility requirement, you cannot treat the rehired employee as a new employee. Instead, service prior to the employee’s termination must be taken into account. Following is a general guideline for determining when a rehired employee should begin participating:

Can Prior Service be Disregarded?

Although prior service usually must be counted, a rehires pre-termination service can be disregarded under the “break-in-service” rules. A “break-in-service” (BIS) occurs when an employee works less than 501 hours during a plan year. There are two break-in-service rules that allow you to ignore prior service. If prior service is disregarded under one of these rules, the plan can treat the rehire as a new employee as of the rehire date, and the employee will have to re-satisfy eligibility. However, both rules have a limited practical application.

These service crediting rules also apply when calculating a rehired employee’s vesting. And, if a rehired employee repays a full distribution upon reemployment, previous forfeitures may need to be restored!

Navigating the Rules

Properly applying the rehire rules can be challenging at best. Both break-in-service rules are optional provisions, and there are various approaches a plan can take to comply with the service crediting rules. Misapplication of these complex rules can result in costly corrective contributions under an IRS error correction program. Please contact us to help you understand the rehired employee rules that apply to your plan, and to determine when a rehired employee should begin participating.

About the Author

Martin McCann is president of McCann Asset Management and is a practicing financial advisor in Fresno, California. He focuses on retirement plans and wealth management for business owners and individuals, and is wildly passionate about delivering long-term, “guaranteed-for-life”, income streams to his clients in retirement. Over the years, Martin has developed and discovered systems that work together to help keep group retirement plans in order. In working with Martin, clients have gained assistance in offsetting fiduciary responsibility, enrollments and participant servicing, education of investment committees and employees, and periodic plan reviews to make sure plan sponsors and participants are getting the most out of their group retirement plan.
Martin can be reached at 559-400-6520 or
Visit the McCann Asset Management web site at