ESOP Plan Participation – Accruing Benefits
Once an employee has met the eligibility requirements of a plan, there may be another set of rules to determine if the employee can participate in the allocation of contributions and forfeitures for that plan year.
A common requirement for an ESOP participant to share in the allocation of contributions and forfeitures is working a certain number of hours during the plan year. While there is no minimum hour requirement that has to be met, a plan cannot have an hours requirement exceeding 1,000 hours during the plan year. If a plan has an hours requirement, the participant has to meet the requirement each year in order to share in the respective year’s allocation.
One important item to note - all hours worked during the plan year are counted towards the hours requirement for the plan, even if a participant is only eligible for a portion of the plan year and their eligible compensation is limited. For example, all hours are counted for new participants that enter the plan mid-year. In addition, if a plan excludes union employees from participating in a plan and an individual converts to a non-union status, the hours worked as union employee are included to satisfy the hours requirement.
Last Day Requirement
A second common requirement for an ESOP participant to share in the allocation of contributions and reallocated forfeitures is being employed on the last day of the plan year. With this requirement, an ESOP participant would not be eligible to share in the contribution allocation even if he or she did satisfy the hours requirement.
Plan documents can have hours and/or last day exceptions for participants that terminate employment due to death, disability, or retirement. The plan document should define the disability and retirement for plan purposes. It is common to see documents drafted with no hours or last day requirements for any of these terminated participants.