Two articles this week have commented on health care costs as being a big factor in the sluggish job market. This article from the New York Times–“Rising Cost of Health Benefits Cited as Factor in Slump of Jobs“–notes how temporary employment is up, largely due to the health care cost factor:
The lagging job market has contributed to brisk growth in the temporary employment industry, where jobs may or may not include health benefits. In July, 2.4 million people were working for temporary agencies, according to the Bureau of Labor Statistics. That was a 9 percent increase from a year earlier, compared with an overall increase in the labor force of 1 percent, to 131.2 million.
In addition, this article from the Philadelphia Inquirer–“Fueling job growth? Part-timers” describes how “[e]ven as the unemployment rate has declined in 2004 and economic output is expanding, the growth in the U.S. labor market is coming from part-timers – workers who clock less than 35 hours a week and typically are not offered health benefits.” According to the article, the cost of benefits in general are discouraging employers from committing to additional full-time employees:
Economists say several forces are behind the trend [of a surge in part-time jobs]: “Businesses are getting better at figuring out how to structure work so it is most beneficial to them,” Reamer said. That means, for example, that a company concerned about the soaring cost of health-care benefits and also uncertain about the economy might offer overtime to an existing employee and hire a part-time employee to get additional work accomplished. This allows the company to avoid the extra health-care-benefit costs of full-time workers.Mark Zandi, chief economist with Economy.com in West Chester, said some growth in part-time workers reflected lifestyle choices of an aging workforce: Some people do not want to put in 40 hours a week. But the main story, he said, is business confidence. Companies are not willing to make the commitment to add full-time employees.
Zandi and others say rising oil prices and the cost of employee benefits, in particular health-care coverage, are making companies think hard about adding full-time staff.
Employers should be careful about the impact part-timers and temporary employees can have on their qualified retirement plans. It is important to note, that part-timers must be allowed to participate in qualified retirement plans, such as 401(k)’s and profit sharing plans, if they have at least 1,000 hours of service during a year and meet the other eligibility requirements for the plan. A part-timer will often meet this 1,000 hour threshold. (Some plans may automatically include part-time employees, without the 1,000 hour threshold, i.e. plans that are based on an elapsed time method of crediting service. You can read this article written by Kirk Maldonado on the subject here.)
A failure to allow part-time employees who earn 1,000 hours during the year and who otherwise qualify to participate in a plan can have unpleasant consequences for employers if they are ever audited by the Internal Revenue Service. The correction method prescribed by the IRS for such errors is contained in Rev. Proc. 2003-44:
.05 Exclusion of an eligible employee from all contributions or accruals under the plan for one or more plan years. The permitted correction method is to make a contribution to the plan on behalf of the employees excluded from a defined contribution plan or to provide benefit accruals for the employees excluded from a defined benefit plan. If the employee should have been eligible to make an elective contribution under a cash or deferred arrangement, the employer must make a QNC (as defined in § 1.401(k)-1(g)(13)(ii)) to the plan on behalf of the employee that is equal to the actual deferral percentage for the employee’s group (either highly compensated or nonhighly compensated). If the employee should have been eligible to make employee contributions or for matching contributions (on either elective contributions or employee contributions), the employer must make a QNC to the plan on behalf of the employee that is equal to the actual contribution percentage for the employee’s group (either highly compensated or nonhighly compensated). Contributing the actual deferral or contribution percentage for such employees eliminates the need to rerun the ADP or ACP test to account for the previously excluded employees. Under this correction method, a plan may not be treated as two separate plans, one covering otherwise excludable employees and the other covering all other employees (as permitted in § 1.410(b)-6(b)(3)) in order to reduce the amount of QNCs. Likewise, restructuring the plan into component plans under § 1.401(k)-1(h)(3)(iii) is not permitted in order to reduce the amount of QNCs.
In other words, the mandated form of correction is for the employer to (1) include the employee as a participant in the plan and (2) put the participant in the same position as if he or she had not been excluded. For instance, if the employer maintains a profit sharing plan and fails to include an eligible employee, the correction is making up contributions the employer would have had to put in for the employee if the employee had not been improperly excluded, plus earnings. For a defined benefit plan, the plan must provide benefit accruals for the excluded employee.
However, in a 401(k) plan, the correction under IRS rules is for the employer to make the 401(k) contribution to the plan on behalf of the employee and to make up the match as well, plus earnings. (The 401(k) contribution amount that the employer must put in for the employee is equal to the average deferral percentage for the employee’s group, i.e. either nonhighly compensated or highly compensated group, as applicable.) Sounds like a windfall to the employee, doesn’t it? The IRS’s thinking in this is that the employee shouldn’t be required to make up 401(k) contributions that it would have made in the past if it had been correctly allowed to participate.
In addition, in a IRS Field Directive issued Nov. 22, 1994, the IRS made it clear that excluding “part-time employees” as a classification is improper under a plan since it would impose an “indirect service requirement on plan participation that could exceed one year of service.”