Blogging Employee Benefits

February 18, 2006

Part-Time Employee Exclusions Revisited

Filed under: IRS — Fuguerre @ 12:09 pm

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.

The IRS has modified its compliance posture toward plan provisions aimed at exclusion of part-time employees, directing the matter be addressed during the course of a determination letter review. [Employee Plans Determinations Quality Assurance Bulletin: Part-Time Employees Revisited, FY-2006 No. 3, 2/14/06]

IRC §410(a)(1) prohibits a plan from requiring completion of more than one year of service (or two years of service in the case of a plan that satisfies 410(a)(1)(B)(i)) for eligibility to participate in a qualified plan. As discussed in a 11/22/94 IRS field directive, plan provisions excluding part-time employees on a basis relating to hours of service or some similar indirect service requirement violate 410(a)(1), regardless of compliance with classification rules in 410(b). However, observing that with respect to a plan provision that imposes an indirect service requirement, examination of relevant facts and circumstances could be time-consuming, a 11/28/00 technical advice memorandum directed review of the issue to be conducted during an IRS examination, rather than in connection with issuance of a determination letter. In July 2001, Publication 794 was revised to state that a favorable determination letter could not be relied upon with respect to plan provisions that impose indirect age or service eligibility conditions. IRS specialists processing determination letter requests were instructed against requesting removal or clarification of plan language relating to part-time employees or other indirect service-related exclusions. (See page 5-34 of Determination processing.)

The IRS is now modifying its determination letter process regarding plan terms that exclude part-time employees or other employees on the basis of indirect service conditions. The policy that a determination letter provides no reliance on exclusion classifications will remain intact; and the examination process will continue to address operational violations. However, during a determination letter review the IRS will now address whether plan documents in form include language that imposes an indirect service requirement that could impermissibly exclude employees who would otherwise satisfy the 410(a)(1) eligibility requirements. —

  • Effective with the opening of the Pre-Approved Program and the Determination Letter Program for EGTRRA, IRS specialists are instructed to request plan administrators to clarify or remove plan language that defines an exclusion classification by reference to service, if that plan provision would result in impermissible exclusion via a minimum service requirement.
  • IRS specialists are advised to closely scrutinize any exclusion classification under the plan terms, including part-time, seasonal, temporary, or any other classification.
  • If plan terms define an exclusion classification without reference to service, then that exclusion classification is not to be challenged under the determination letter process.

The new IRS document also provides guidance on IRC §7805(b) retroactive relief relating to impermissible service-related exclusion classifications —

  • Plans that received a determination letter on or after 7/1/2001 are not entitled to retroactive relief.
  • Plans that received a determination letter prior to 7/1/2001 may be entitled to retroactive relief, unless the letter included a caveat indicating that the letter could not be relied upon with respect to the plan’s exclusion classifications.

Three examples are presented in the new IRS document.


  1. It May Be Becoming More Difficult to Exclude Part-Timers from Receiving Employee Benefits

    Traditionally, one of the reasons that there has been a shift from so-called core, full-time employees to contingent, part-time employee is because the latter group is generally not eligible for employee benefits like retirement plans and health insur…

    Trackback by Workplace Prof Blog — February 19, 2006 @ 11:46 am

  2. Not to be missed are Benefitsblog‘s excellent comments on the examples given in the IRS bulletin and her comments about part-time employee issues in an earlier Benefitsblog posting.

    Comment by Fuguerre — February 24, 2006 @ 10:26 am

  3. This is off in a different direction, but for now I’ll tuck it in this corner of my part-time workers’ blogfile: Bush Seeks to End Retirement Penalty for Part-Time Service, by Karen Rutzick,, 2/13/06.

    Comment by Fuguerre — February 24, 2006 @ 4:48 pm

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