Step 1: Decide Your Categories
Choose whether union, salaried, hourly and state-based groups get different treatment, and which method each group uses. Everything else follows from this choice.
The three things to know.
List Your Groups
Union and non-union employees, each collective bargaining agreement, salaried and hourly staff, and employees working primarily in different states are the categories the regulation permits.
Match Method to Workforce
Steady schedules suit monthly measurement. Variable hours suit look-back. Many employers use both for different groups.
Record the Decision
Write down the categories and the reasons, so the design can be explained later.
Sources: 26 CFR § 54.4980H-3. General information, not legal advice.
A worked example.
A Two-Category Employer
A distributor has 60 hourly warehouse workers with variable overtime and 25 salaried office staff on steady schedules.
What the Rule Produces
The employer puts the hourly group on a 12-month look-back and the salaried group on monthly measurement. Each group has one written design, so every employee in a category is treated the same way.
Four steps to apply it.
1. List the groups
Write down the permitted categories you have.
2. Check the hours pattern
Look at how hours move in each group.
3. Choose a method
Pick monthly or look-back for each.
4. Record the reasons
Note why each choice fits.
Where it goes wrong. Splitting people into categories the regulation does not allow.
The questions that come up next.
Do we need categories at all?
No. Many employers use one method for everyone. Categories are an option when groups differ.
Who decides?
The plan sponsor, with input from HR, payroll and advisors.
Can categories change next year?
Yes, with a documented decision and transition planning.
Do we have to use categories?
No. Many employers use one method for everyone.
Can a category be a single location?
Only if it fits a permitted category such as employees working primarily in different states. Check with counsel.
Plan-specific questions belong with ERISA counsel, and we will bring them in.
Related pages on the look-back method.
Step 2: Choose the Period Lengths
Set the measurement, administrative and stability periods, and confirm the stability period is at least six months and no shorter than the measurement period.
Step 3: Write It Into the Plan
Put the periods and your break-in-service rules in the plan document and summary plan description, applied uniformly within each category.
The Full Look-Back Guide
Every rule, example and source behind this page, in one place.
Talk it through with someone who runs this every year.
We help you choose the design, document it and reconcile the hours before the numbers reach your reporting.
An independent employee benefits consulting firm. We look at the entire benefits program — cost, plan performance, risk and administration.
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