Dear Workforce: How Does 1,000-Hour Rule Apply to Non-Retirement Benefits?

Dear Workforce:

Does the 1,000-hour IRC and ERISA rule apply to other benefit programs, besides retirement, such as group health plans?

—Bedeviled by Details, benefits consultant, services, Clermont, Florida

Dear Bedeviled:

The best-known 1,000-hour rule is contained in Part 2 of Title 1 of the Employee Retirement Income and Security Act of 1974 (ERISA) and generally only applies to employee pension benefit plans. It’s also mentioned in the Internal Revenue Code (IRC) Sections 410(a) and 411(a) regarding participation and vesting in retirement plans.

The concept of 1,000 hours has received attention lately in the Section 403(b) universal availability requirement in the final 403(b) regulations. Under that requirement, employees who are not expected to work at least 20 hours per week need not be offered the opportunity to make salary deferrals.

However, the IRS added that once such an employee works at least 1,000 hours in a year, he or she must become a participant in the following year. As pointed out in the preambles to both the proposed and final regulations, the exclusion for employees who are "expected to work (fewer) than 20 hours" is available only for non-ERISA 403(b) plans.

Although the 1,000-hour rule is best known in retirement circles, it also has some applicability with group welfare plans—generally only with respect to nondiscrimination testing.

Unfortunately, it is not applied on a consistent basis and does not apply to all benefits.

For example, in determining eligibility for nondiscrimination purposes under a dependent-care assistance program under IRC Section 129, employees with less than one year of service (defined with reference to the 1,000-hour requirement of IRC Section 410(a) can be excluded.

Additionally, for similar purposes, under group-term life insurance plans (IRC Section 79) and self-insured group health plans (IRC Section 105(h), employees with less than three years of service can be excluded. The regulations under IRC Section 105(h) state that although other methods can be used to measure service, the 1,000-hour requirement in IRC Section 410(a) would be reasonable.

It is interesting to note that both group-term life insurance plans and self-insured group health plans are permitted to exclude part-time and seasonal employees. IRC Section 105(h) defines a part-time employee as someone whose customary employment is less than 25 hours a week.

As a result, the 1,000-hour rule for such plans may not be an absolute figure. However, any exclusion for "part-time" employees is not an acceptable exclusion for retirement plans.

Group health plans that are insured are generally not subject to nondiscrimination rules, with regard to service requirements, under ERISA or the IRC unless offered through a cafeteria plan.

Other types of benefit programs, such as education assistance programs and adoption expense programs, are also subject to nondiscrimination rules, but those rules are not as well developed as are those for the benefit plans mentioned above.

SOURCE: John Kent Graham, regional director of compliance, Sibson Consulting, New York, February 24, 2009

LEARN MORE: The U.S. Department of Labor provides an FAQ on ERISA that aims to help employees understand the law.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.