Pension Protection Act Blog

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the Determination Letter Program for EGTRRA, the guidance in the Recurring Issue Focus issued on September 6, 2002 is rescinded.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.

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