Whether they left to pursue another opportunity, were away on personal leave, or separated for other reasons, bringing an employee back on board is fairly common. Their valuable experience and familiarity with your company can make rehires attractive. However, when an employee rejoins an ESOP company, there are also decisions about plan participation, vesting, payouts, and other administrative touchpoints to consider.
Understanding how rehiring fits into your ESOP ensures compliance and protects the plan’s financial health, while also helping employees regain the valuable benefits of employee ownership.
Let’s take a closer look at how rehiring affects ESOP participation and best practices for effective rehiring.
ESOP Companies & Rehiring Eligibility
Your plan contains eligibility rules that define eligible participants. Usually, these rules are built around employee age and service requirements.
Applying these rules to a rehire situation is essential, and may bring up eligibility questions including:
- Does the employee’s prior service count toward eligibility, or will they need to meet initial criteria again?
- If the employee left prior to becoming eligible for plan participation, does previous service count toward eligibility upon rehire?
- Is there a waiting period associated with resuming participation, or is it immediate?
Your ESOP plan document will outline how your company manages rehires but there are some generally accepted norms. If the break in employment is relatively short, most ESOP plans allow prior service to count toward eligibility. Conversely, longer absences may reset the employee’s eligibility requirements. But deciding where the employee falls on the absence continuum isn’t arbitrary. This is where break-in-service rules apply.
Break In Service
Most ESOPs follow break-in-service rules to determine reinstatement of previous service and vesting. A Break In Service:
- Is typically defined as an employee who worked 500 hours or less in a plan year
- May also only apply to those who terminated employment (part-time, on-call, or leave-of-absence employees are considered actively employed and generally would not incur a break in service)
The plan document should also clearly outline criteria for handling prior service earned. In most cases, participants with any vested interest in the plan at termination are entitled to keep their prior service and vesting earned upon rehire.
Vesting & Service Credit
The break-in-service rules revolve largely around vesting.
When an employee leaves, vesting determines the percentage of their ESOP account they are entitled to upon departure. When an employee returns, vesting refers to the past credit they may be given on rehire depending on the ESOP’s specific rules.
The length of absence and the employee’s vested percentage prior to termination is pivotal in determining if previous vesting credit is granted or ignored upon rehire.
There are special cases to consider with rehires, and it’s crucial you know what your plan document lays out with regard to:
- Layoffs v. voluntary separation: Does the plan differentiate between employees who were laid off then later resumed work, and those who voluntarily resigned and were then rehired?
- Union/Non-Union employees: Even if the ESOP excludes Union employees from receiving benefits, an employee’s service as a Union worker still counts toward vesting if they later switch to a Non-Union status. This means any time worked as a Union employee contributes to the vesting percentage for ESOP allocations earned while employed as a Non-Union worker
- Leased/temporary employees, college interns, and independent contractors: Similar to Union employees, these groups may not be considered employees for ESOP benefit purposes. However, their service is generally credited for eligibility and vesting purposes if/when they switch to an eligible employment status
- Leave of Absence: The plan will generally recognize that a participant on an approved leave of absence (such as maternity/paternity leave, FMLA, jury duty, etc.) may be credited with up to 500 hours to prevent a break in service for the plan year
- Military Leave: Under the Uniformed Services Employment and Reemployment Rights Act (USERRA), employees who are absent from work due to military service and training are protected and have rights to be reemployed in the same position as they had when they left. The Plan Sponsor is also required to make up any retirement plan contributions that the employee missed while on military leave
Impact on ESOP Payouts & Forfeitures
Another critical question to answer when rehiring an employee is whether they previously received an ESOP payout and/or incurred a forfeiture of their non-vested balance:
- If they were 100% vested and took a full distribution, they have no prior ESOP balance to consider when reentering the plan
- If they were 0% vested and forfeited their full balance, they likely will be entitled to a reinstatement of their forfeiture if rehired before incurring a Break in Service of at least 5 consecutive plan years
- If they were partially vested and received a distribution or incurred a forfeiture, rehired employees generally have the option to repay the distribution to get the forfeiture reinstated. This option is available up to 5 years after their rehire date, or after they incur five consecutive breaks in service, whichever is earlier.
Regardless of the category they fall into, a rehired employee who becomes eligible for plan participation is entitled to receive new ESOP allocations.
Fiduciary, Compliance & Financial Considerations
There is no gray area in fiduciary and regulatory compliance. ESOP trustees and plan administrators must ensure consistent treatment of rehired employees to avoid sanctions and potential penalties as set by the rules of the U.S. Department of Labor (DOL) and the IRS. Any variations in handling eligibility, vesting, or distributions could initiate an audit or review by the governing authority.
Likewise, rehiring employees could impact the financial strength and structure of the plan itself:
- Repurchase obligation: If a returning employee was fully paid out, there is the possibility of creating additional financial obligations for the ESOP
- Share allocation: A rehired employee who regains participation privileges impacts the share distribution among all employee owners
- ESOP valuation: A rehired employee adds to the number of plan participants, which can influence the ESOP’s overall financial health
Best Practices for Managing ESOP Rehires
Seeking guidance from ESOP experts and working with your trustee is a solid strategy for managing any potential plan implications brought about by rehires. So, too, is establishing some best practices to follow for managing rehires.
Document Rehire Policy
- Clearly define how eligibility, vesting, and distributions are handled for rehires
- Identify and train HR team members and management who are responsible for applying the rehire policy
- Proactively communicate with rehires to prevent misunderstandings
Provide Guidance & Resources to Rehires
- Summarize ESOP eligibility and vesting status as soon as possible upon the employee’s return
- Offer educational resources to help rehires understand their benefits
- Prepare the HR team to field common ESOP-related questions from rehires
Partner with ESOP Experts
- Review and refine policies by regularly consulting with ESOP advisors and related professionals
- Ensure compliance with DOL and IRS regulations by establishing checks and balances with your ESOP trustee
- Identify and strategize for potential financial impacts, including repurchase obligations
Beyond Rehires
Rehiring employees can be a substantial value-add, but it also brings important ESOP considerations. By understanding the plan impacts and building policies to address them, you can simplify the process for returning employees and your company.
Working with ESOP experts such as the ESOP Partners team is essential for successful rehiring and maximizing all aspects of your plan. Employee ownership isn’t a one-and-done scenario; managing your plan requires year-long effort.
That’s why we created the ESOP Administration Timeline planning tool. It helps you oversee your entire plan year and important recordkeeping, administrative, and regulatory deadlines for compliant administration.
