Break in Service

A break in service is a period in which an employee works too few hours to be treated as continuing in service under a retirement plan. The Internal Revenue Code and ERISA define a "1-year break in service" as "a calendar year, plan year, or other 12-consecutive-month period designated by the plan ... during which the participant has not completed more than 500 hours of service." The term is the counterpart of a year of service, which generally requires 1,000 hours, so in a plan using that standard a year with between 501 and 999 hours is neither: it earns no vesting credit and it is not a break.

Why the rules exist. Vesting schedules reward years of service, and a worker who leaves and returns raises an obvious question: do the earlier years still count? Federal law answers with a set of break-in-service rules in IRC 410(a)(5) for eligibility to participate and IRC 411(a)(6) for vesting, mirrored in ERISA. A plan may be more generous than these rules; they set how much earlier service a plan is allowed to ignore.

The one-year hold-back. Under 411(a)(6)(B), when an employee has a 1-year break in service, the plan does not have to count their pre-break years until they have completed a year of service after returning. Once they do, the earlier years come back into the count. The participation rule in 410(a)(5)(C) works the same way.

Five consecutive breaks in a defined contribution plan. Under 411(a)(6)(C), a participant in a 401(k) or other defined contribution plan who has five consecutive 1-year breaks does not have to be given vesting credit for service after those five years toward employer money that accrued before them. In plain terms, a long gap can freeze the vested percentage of the old employer account where it stood, even though new service will vest new contributions.

The rule of parity for workers with nothing vested. Under 411(a)(6)(D), a "nonvested participant", meaning one with no vested right to any employer-funded benefit, can lose credit for pre-break service entirely. That happens only if the number of consecutive 1-year breaks equals or exceeds the greater of five or the number of years of service before the breaks. Someone with three years before leaving would need five consecutive breaks; someone with seven years before leaving would need seven.

Absences that do not cause a break. Section 411(a)(6)(E) requires a plan to credit hours, solely to decide whether a break occurred, for an absence due to pregnancy, the birth of a child, the placement of a child for adoption, or caring for the child immediately afterward. The plan credits the hours the person would normally have worked, or 8 hours a day if it cannot tell, up to 501 hours, which is exactly enough to stay above the 500-hour line. The hours go into the year the absence starts if that prevents a break there, and otherwise into the following year. Separately, for paid time off, a Department of Labor regulation (29 CFR 2530.200b-2(a)(2)) does not require a plan to credit more than 501 hours of service for any single continuous period of paid non-working time, so a very long paid absence does not by itself carry a full year. And the Uniformed Services Employment and Reemployment Rights Act provides that a person reemployed after military service is treated as not having incurred a break in service because of that service.

Plans that count time, not hours. Some plans credit service under the elapsed-time method instead of counting hours. Under that method the Treasury regulations use a "period of severance", which begins when the employee quits, retires, is discharged or dies, or on the first anniversary of an absence for any other reason, and they apply the statutory break-in-service rules through that concept. A rehire within 12 months of a quit, discharge or retirement must have the period of severance counted as service.

Long-term, part-time workers. For an employee who became eligible for a 401(k) under the long-term, part-time rules, section 401(k)(15) treats each 12-month period with at least 500 hours as a year of service for vesting in employer contributions, and redefines a break for that employee as a period with fewer than 500 hours.

What the plan document controls. Which 12-month period the plan measures, whether it uses hours or elapsed time, when an unvested balance is actually forfeited, and whether it offers anything more generous than the statute are all plan terms. The summary plan description is where a returning worker should look first. One protection to know about: a plan that disregards service because it paid out a partly vested departing worker's vested benefit must give a returning participant the chance to repay the distribution and have that service counted again in figuring the benefit, within the window section 411(a)(7)(C) allows.

A returning or long-absent worker can test their own situation in three steps.

1. Count the hours in each computation period the plan uses. More than 500 hours means no break; 1,000 or more generally means a full year of service.
2. Check for protected absences. Pregnancy, birth, adoption or newborn-care absences earn up to 501 hours toward avoiding a break, and qualifying military service is not a break.
3. Apply the rules to the gap. One break delays the return of earlier years until a year of service is completed after rehire. Five consecutive breaks can freeze vesting in pre-break employer money in a defined contribution plan. A worker with nothing vested can lose pre-break years if the consecutive breaks equal or exceed the greater of five or those earlier years.

For example: Wendell worked four years for an employer whose 401(k) uses a six-year graded vesting schedule and gave him a 60% vested share of a $10,000 employer-funded balance, so $6,000 was his and $4,000 was not yet vested. He leaves the money in the plan, takes three years off, and is rehired. Three breaks are fewer than five, so his four earlier years count again once he completes a year of service after returning, and his vesting continues from there. Had he stayed away five consecutive years, section 411(a)(6)(C) would let the plan stop increasing his vested share of that original $10,000, leaving it at 60%, or $6,000, even after he returned, while the new contributions vest on their own schedule. Whether and when the plan forfeits the unvested $4,000 is a plan term.

Pros

• A worker who comes back after a short absence generally gets earlier service credit restored after one year back.
• Parental and military absences carry specific protections, so a common reason for time away does not cost service credit.
• Someone who already has some vested money is protected against losing earlier years for vesting purposes, apart from the five-break rule on old employer money.

Cons

• A year with 500 or fewer hours can quietly reset progress for a worker who has nothing vested yet.
• Five consecutive breaks can permanently fix the vested percentage of old employer contributions.
• The measuring period, the counting method and forfeiture timing are set by each plan, so the answer varies between employers.
• Long paid leave earns limited hours credit, so it does not always protect a year.