Benefits & ERISA Law

Some Plan Implications of Reclassification as IBM Reclassifies Employees from Salaried to Hourly

By Suzanne Wynn

Paul Secunda has an interesting post today on the Workplace Prof Blog about IBM reclassifying workers from salaried to hourly. The corporate buzzword for this is “reclassification”, and the story, which originated on NPR Marketplace, also mentions FedEx reclassifying drivers as independent contractors, and Allstate reclassifying agents as independent contractors.

For plan documents, the grandfather of reclassification is Microsoft. Several years ago, Microsoft reclassified employees as independent contractors, and within their plan document, excluded employees classified as independent contractors from becoming participants. Microsoft’s reclassification language spread through qualified plan documents, and is memorialized in IBM’s plan document, as of the January 1, 2005 restated plan, as:

“1.20. “Employee” means an employee of any Employer who receives stated compensation other than a pension, severance pay, retainer, or fee under contract. The term “Employee” excludes any Leased Employee and any person who is included in a unit of employees covered by a collective bargaining agreement that does not provide for his membership in the Plan. Any person deemed to be an independent contractor by any Employer and paid by the Employer in accordance with its practices for the payment of independent contractors, including the provision of tax reporting on Internal Revenue Service Form 1099, shall be excluded from the definition of Employee for all purposes under the Plan, notwithstanding any subsequent reclassification of such person for any purpose under the Code, whether agreed to by the Employer or adjudicated under applicable law.”

Section 1.46 of IBM’s plan document defines “Regular Employee” as:

“1.46. “Regular Employee” means an Employee as so defined by the rules and regulation of his Employer, who is (i) compensated by salary or by commission, or partly by salary and partly by commission, (ii) subject to the Employer’s performance evaluation program, and (iii) employed for an indefinite period.”

Eligibility is contained in Section 3.01 of IBM’s plan document, which states:

3.01. Eligibility

(a) Except as provided in subsection (c), each Employee of an Employer shall be eligible to become a Participant at any time during service as a Regular Employee.

In this type of plan which restricts eligibility to Regular Employees as defined by the plan document, and Regular Employees are defined as employees paid by salary or comission, hourly employees are not eligible to participate in the 401(k) plan. For plan documents, this is the real issue with Reclassification because it can be used by some companies to restrict plan participation.

Once an employee becomes a participant in the plan, they cannot be reclassified out of participating. For reclassified employees, Section 3.04(a) of IBM’s plan states that:

3.04. Effect of Status Change on Participation.

(a) Except as provided in subsection (b), a Participant who

(i) has been employed by the Employer or an Affiliate as a Regular Employee, then

(ii) ceases to be a Regular Employee, but

(iii) remains in the employ of an Employer or an Affiliate

shall continue to be a Participant in the Plan, but shall not be eligible to receive allocations of Deferred Cash Contributions or Matching Contributions, and shall not be eligible to make After-Tax Contributions, while his employment status is other than as a Regular Employee.

And this really is the heart of Reclassification when is comes to qualified plan documents - the reclassification has an impact plan eligibility and on employer contributions into the plan. For participants who are reclassified out of employer contributions, they remain as participants but their accounts will not grow as the employer prospers. The NPR Marketplace story states that IBM reported a 25 percent jump in profits a couple of weeks ago so it is not clear why IBM decided to engage in reclassification.

Technorati Tags: Pension Protection Act, ppa, reclassification, IBM, eligibility, independent contractor, NPR Marketplace, Workplace Prof, Paul Secunda, ERISA

Full post as published by Pension Protection Act Blog on April 29, 2008 (boomark / email).