Hours of Service: To Count, to Track, or to Look Back

Hours of Service: To Count, to Track, or to Look Back
When it comes to providing census information for defined contribution plan recordkeeping, an employee’s hours of service are among the most important aspects. Employee hours can affect eligibility, allocations, vesting, and determination of breaks in service. Reporting hours might seem straightforward, but in many situations, hours might not be tracked by employers, such as hours for salaried employees, various types of leave, jury duty, sick pay, and vacation. 

However, reporting accurate hours is important, and failure to record them accurately can affect a participant’s vesting or allocation eligibility. To help track hours, employers have options for how hours are credited for plan purposes, and they can choose the method that works best for their employees and their intentions.

Under Department of Labor (DOL) Regulation 2530.200b-2, employees generally are entitled to receive credit for each hour they are paid for the performance of duties and for hours in which no services are performed, such as paid leave, sick pay, military leave, and vacation. If a plan uses actual hours to track hours, all hours, including nonperformance hours, must be included. 

Different types of hours may be reported separately in the payroll system and must not be excluded from employees' hours on the census. DOL regulations also provide that hours are taken into account irrespective of whether the employment relationship has ended. For example, if an employee receives payment for unused paid time off when employment has terminated, the hours for which the employee received payment must be credited for the period of unused time off.

Reporting hours

Certain types of unpaid leave, such as maternity and paternity, require an employer to credit up to 501 hours of service to the employee in order to avoid the employee incurring a break in service. Military leave also requires hours to be credited so that service is continuous. However, the hours need to be credited only if the employee returns to work. Hours are not required to be credited for unpaid leave under the Family and Medical Leave Act of 1993 (FMLA). 

On the other hand, certain types of compensation require no hours to be reported, such as payments under a plan maintained solely to comply with disability insurance laws, workers’ compensation, unemployment, and payments for medical reimbursement. In addition, hours should never be double counted.

Tracking methods

When hours are not reported for certain types of employees, the plan document should address how hours are credited, or it should specify an equivalency method used to determine hours. DOL regulations provide options for hour equivalencies based on working time, periods of time, or earnings. Equivalencies based on working time credit employees based on hours worked, treating 870 hours as equal to 1,000 hours and 435 hours as 500, or on regular hours (only regular workweek hours), treating 750 hours as 1,000 and 375 as 500 hours.

The equivalency methods using periods of time have bases of 10 hours per day, 45 hours per week, 95 hours per semimonthly payroll, and 190 hours per month. Employees are credited with these hours if they worked at least one hour during the computation period elected by the plan document. For shift employees, the plan also may use shifts as a computation period base, crediting normal shift hours for any shift period in which the employee worked at least one hour.

Equivalency methods also may be based on earnings. To base an equivalency method on earnings, an employee’s compensation is divided during the period by the lowest hourly rate of pay for employees in the same or similar job. With this method, 870 hours are treated as 1,000 hours, and 435 hours are treated as 500 hours.

Another method for tracking service is elapsed time. The advantage to this method is that there is no need to track hours. Periods of time – instead of hours – are tracked, and employees earn a year of service regardless of the number of hours worked. A year of service is earned simply by being employed at the end of the period. This method likely will cause seasonal and part-time employees to enter the plan and earn vesting service, which might not be the plan sponsor’s intention. Seasonal employees, for example, can be gone for half the year, but as long as they are employed at the end of the service period, they earn another year of service. 

Choosing the best method

Companies can choose from many options when it comes to crediting hours for benefit plans. All methods have advantages and disadvantages depending on the type of employees and the intention of the plan sponsor. 

The actual hours method works well for employers that want to provide benefits to their full-time and longer-term employees, but it is more of an administrative burden. The equivalency method requires continuous service in order to receive credit, but it can result in part-time participants with the same service crediting as full-time employees. The elapsed time method has the benefit of not requiring hours to be tracked, but it provides benefits for all employees regardless of hours worked. The plan sponsor’s intentions, the payroll system and types of employees, and the ease of plan administration must all be weighed when determining which method of crediting hours to use. 

Regardless of the method chosen, it is important that the hours be determined correctly. While it’s common to think of hours as hours worked, it might be easier to think of hours in terms of hours for which an employee is paid, including hours the employee is entitled to be paid for events such as sick leave, vacation, and parental leave.

Contact us

Heather McNabb
Pete Shuler - social
Pete Shuler
Principal, Benefit Plan Tax Services Leader