What Is a Break in Service in a 401(k)?

Leaving the company is not the same thing as incurring a break in service.

Termination is an employment event.

A statutory break is a service-crediting result measured over a specified 12-month period.^[3][4][5]

Under the ordinary hours method, a plan may treat an employee as having a one-year break when the employee completes:

500 or fewer hours of service

during the applicable computation period.^[4][5][7]

That makes the boundary unusually important:

• 500 hours: ordinary break threshold is met
• 501 hours: ordinary break threshold is not met

The distinction affects eligibility service, vesting, forfeitures and rehire administration.

It also exposes why HR status codes are unreliable. An employee can terminate in August and still have enough credited hours to avoid a break for that year's computation period.

Key Takeaways

• Severance from employment does not automatically trigger the statutory break rule.
• Under the ordinary hours-based framework, a break generally means a designated 12-month period with no more than 500 hours.^[4][5][7]
• Exactly 500 hours is within the ordinary break definition.
• Eligibility and vesting can use different computation periods, so break timing can differ for those two purposes.^[5]
• An elapsed-time plan uses a different break concept tied to a 12-month period of severance rather than the ordinary hours threshold.^[7]
• Prior service is generally counted unless a specific break rule permits the plan to disregard it.^[3][6]
• Some plans can use a one-year holdout rule after a break, temporarily withholding pre-break eligibility service until the returning employee completes a post-return year of service.^[2][3][5][6]
• When the employee completes that required post-return year, the holdout rule restores the prior eligibility service under the applicable framework.^[2][6]
• A separate rule of parity can permanently disregard pre-break service for a participant who had no vested employer-derived benefit if consecutive breaks reach the greater of:
• five, or
• the participant's aggregate pre-break years of service.^[3][4]
• A participant with any vested employer-derived benefit does not fit the nonvested-participant parity rule.^[7]
• Defined contribution plans have another five-break rule that can prevent post-break service from increasing the vested percentage of employer benefits accrued before the break.^[4][7]
• Maternity/paternity absence can receive up to 501 hours solely to prevent a break in service.^[4][8]
• USERRA military reemployment rights are broader and can require service, contribution and vesting credit.^[8]
• A prior cash-out can trigger restoration rights if a rehired participant repays the distribution within the applicable period.^[11]
• The LTPT 500-hour rules use the same number for a different purpose. Do not merge the tests.^[12]

Termination and Break in Service Are Different Events

Assume a calendar-year vesting computation period.

Departure date:

August 31

Hours credited before departure:

1,150

The employee has terminated.

But the employee has not incurred a one-year break for that calendar-year vesting period because service exceeded 500 hours.

Now change the hours:

400

The employee can have both:

• a termination
• a break for that computation period

for that computation period.

The termination date tells the plan when employment stopped.

The hours tell the plan whether the break rule was triggered.

A Six-Month Absence Is Not Automatically a Break

Suppose service stops June 30 and resumes December 1.

Calendar-year credited service:

900 hours

No ordinary one-year break occurs for that calendar year under a plan using the calendar year for the relevant break computation.

The employee was gone for five months.

Length of absence alone does not answer the hours-based test.

Exactly 500 Hours Is a Break

The statutory language is not:

fewer than 500

It is:

not more than 500.^[4][7]

That means:

One hour can change the result.

That is why paid leave, back pay and other service-credit rules from INV-095 can matter near the boundary.

Eligibility Break and Vesting Break Can Use Different Clocks

For eligibility, the plan uses the applicable eligibility computation period when determining a break.^[5]

For vesting, it uses the designated vesting computation period.^[5]

Those periods can differ.

Example: One Absence, Two Measurement Periods

Employee starts:

October 1, 2025

Assume:

Eligibility periods after the initial period

Employee anniversary years

Vesting period

Calendar year

Service ends:

March 31, 2027

The employer cannot simply label 2027:

break year

for every plan purpose.

The plan must calculate service inside:

• the eligibility period
• the vesting period

separately.

Different periods can reach the 500-hour boundary at different times.

A Break Does Not Automatically Erase Prior Service

Section 410 starts with a general rule:

all years of service are taken into account

unless a specified exception permits otherwise.^[3][6]

That is the correct default.

A rehire record should therefore not begin with:

prior service = 0

It should begin with:

which prior service may legally be disregarded, if any?

Rehire Without a Break Is Usually the Easy Case

IRS model plan language for defined contribution plans reflects the core result: if a former participant's prior service cannot be disregarded, the participant continues participation or participates immediately upon reemployment when the applicable conditions are met.^[2]

That means a participant who leaves briefly and returns before incurring a one-year break should not ordinarily be administered as a first-time hire solely because payroll issued a new employee ID.

The plan still needs to confirm:

• eligible employee class
• plan terms
• contribution feature
• service history

But a new HR record is not a new legal service history.

Example: Participant Returns After Four Months

Employee had:

• already entered the 401(k)
• three years of credited service
• 60% vesting in employer contributions

The participant departs in May.

Employee returns in September.

No one-year break occurs under the plan's applicable computation period.

Treating the worker as:

new hire — zero service

would conflict with the service history the plan is required to preserve.

The One-Year Holdout Rule Is Permitted, Not Automatic

A different rule can apply after an actual one-year break.

Section 410(a)(5)(C) permits a plan to disregard service earned before the break until the returning employee completes a year of service after returning.^[3][6]

IRS's current defined contribution plan model language calls this the:

one-year hold-out rule.^[2]

A plan does not get this delay merely because HR prefers it.

The plan needs language that uses the permitted rule.

How the Holdout Works

A plan using the holdout can temporarily say:

Do not count the old eligibility service yet.

The returning employee then completes the required post-return year of service.

At that point, the pre-break service comes back into the eligibility calculation under the rule.^[2][3][6]

This is a temporary hold.

It is not necessarily permanent service cancellation.

Example: Rehire After One Break

Employee completed:

1 year of eligibility service

before leaving.

Then the employee incurs:

1 break year under the plan

The employee returns.

Plan contains the permitted one-year holdout.

Before the employee completes the required post-return year, the plan can temporarily disregard pre-break eligibility service.^[3][6]

Once the employee completes that year, the prior service is restored for the applicable calculation.

IRS model language provides that when the post-return year is completed, participation is reinstated as of the reemployment commencement date under that provision.^[2]

Reemployment Has Its Own Measurement Date

DOL rules define a reemployment commencement date for measuring the post-break year under a plan using the holdout framework.^[5]

For the relevant hours-based rule, it generally starts on the first day after the applicable break period that the returning employee is entitled to an hour of service for duties performed.^[5]

The later periods depend on whether the plan uses:

• anniversary-based eligibility periods
• plan-year periods.^[5]

Rehire administration therefore needs more than:

return date

It needs the plan's computation-period method.

The Rule of Parity Is Different

The one-year holdout is temporary.

The rule of parity can permit pre-break service to be disregarded permanently for a specific type of participant.^[3][4]

The rule applies to a participant who had:

no nonforfeitable right in employer-derived benefits

before the break period.^[3][4]

The uninterrupted break period must equal or exceed the greater of:^[3][4]

• 5
• the employee's aggregate years of service before the break.

That is a very different test from:

five years away resets everyone.

Example: Three Pre-Break Years, 0% Vested

Employee has:

3 years of service

Employer-contribution vesting:

0%

Employee leaves.

Parity threshold:

Greater of:

• 5
• 3

Result:

5 break years in a row

If the plan contains and validly applies the rule, five consecutive breaks can permit the old service to be disregarded for the applicable participation and vesting purposes.^[3][4]

Example: Seven Pre-Break Years, 0% Vested

Employee has:

7 pre-break years

Vested employer benefit:

0%

Parity threshold:

Greater of:

• 5
• 7

Result:

7 break years in a row

Five is not enough.

The participant's prior service total controls because it is larger.

Partially Vested Is Not the Same as Nonvested

Suppose the participant had:

40% vested employer contributions

before leaving.

That participant has a nonforfeitable right in an employer-derived benefit.

The nonvested-participant rule of parity does not apply in the same way.^[7]

This distinction is critical.

A system that asks only:

How many years was the employee gone?

does not have enough information.

It also needs:

Was any employer-funded benefit vested before the break?

Five Breaks Appear in Another Rule

Defined contribution plans have a separate provision triggered after:

five uninterrupted break years.^[4][7]

After that period, post-break service is not required to increase the vested percentage of employer-derived benefits that accrued before the break.^[4]

This is not the same as parity.

Two Five-Break Rules, Two Different Jobs

Rule of parity

Applies to a participant with zero vested employer-derived benefit and can permit disregard of pre-break service when the break period reaches the greater of five or prior service years.^[3][4]

Defined contribution five-break vesting rule

Can separate pre-break employer accruals from post-break vesting service after five consecutive breaks.^[4][7]

The same number appears.

The legal effect is different.

Example: Partially Vested Participant Returns After Five Breaks

At departure, the employee has:

• 4 years of vesting service
• 60% vested in an employer contribution account

Employee then has:

5 break years in a row

The employee is not a 0%-vested parity case.

The vested 60% does not disappear.

But the separate defined contribution rule can affect whether later post-break service must increase the vested percentage of the pre-break employer account.^[4][7]

For employer contributions earned after return, pre-break service can still matter under the applicable vesting rules.^[7]

This is why a single field labeled:

prior service counted? yes/no

is too crude.

Pre-Break and Post-Break Employer Money Can Need Separate Vesting Treatment

After a long break, the plan may effectively need two vesting histories:

Employer contributions accrued before the break

Subject to the break rules applicable to pre-break benefits.

Employer contributions accrued after return

Subject to the rules governing post-break benefits, which can require pre-break service to be considered differently.^[7]

Account source and service period matter together.

INV-054 explains the basic vesting framework.

Forfeiture Does Not Always Happen on the Termination Date

IRS explains that nonvested employer amounts can be forfeited under plan terms when:^[1]

• the participant receives the vested account balance
• or after an extended period of limited or no service, such as five years in plans using that approach.

A participant can therefore leave employment while the nonvested portion remains conditionally tracked.

The account display is not always the final legal status.

A Cash-Out Can Trigger a Restoration Right

Some defined contribution plans cash out a former participant's vested balance and forfeit the remaining nonvested employer account under the plan's terms.

Federal rules can require the plan to provide a path to restore the forfeited employer-derived benefit if the participant:^[11]

• returns to covered employment
• repays the required distribution within the permitted period.

The repayment provision is not optional when the plan relies on the relevant cash-out/forfeiture structure.^[11]

Example: $1,000 Account, 25% Vested

Assume:

• employer-derived account: $1,000
• vested percentage: 25%
• participant receives $250
• $750 is forfeited under the plan's cash-out provision

Employee later returns and satisfies the plan's repayment conditions.

Treasury regulations provide that, after full repayment of the distributed amount, the restored defined contribution benefit cannot be less than the prior account balance consisting of the amount distributed plus the amount forfeited, without adjustment for intervening investment gains or losses under that restoration rule.^[11]

Conceptually:

$250 repaid → $1,000 restored account

subject to the governing plan provision and regulation.

The Repayment Window Has Limits

For a distribution caused by separation from service, the plan's repayment deadline generally cannot expire before the earlier of:^[11]

• five years after the employee is subsequently reemployed
• the close of the first five-year break sequence beginning after the distribution.

A plan can allow a longer repayment period.^[11]

The exact facts matter because the break period may begin before the employee returns.

Rehire Does Not Restore Every Forfeiture Automatically

Restoration depends on:

• why the forfeiture occurred
• whether a distribution occurred
• plan language
• vesting status
• number of breaks
• repayment, when required
• timing.

Do not tell a rehired participant:

"Your old unvested balance comes back automatically."

Do not tell the participant:

"That money is gone forever."

Read the forfeiture and restoration provisions.

Maternity and Paternity Absence Has a Special Break-Prevention Rule

Federal law gives special hours solely to prevent a one-year break for certain absences related to:^[4][8]

• pregnancy
• birth of a child
• placement of a child for adoption
• caring for the child immediately after birth or placement.

The plan credits the hours that otherwise would have been credited, or uses eight hours per day when those hours cannot be determined, subject to a maximum of:

501 hours.^[4]

That number is deliberate.

At the ordinary break threshold, moving from 500 to 501 prevents the break.

The 501 Maternity/Paternity Hours Are Not General Benefit Credit

The special hours are credited:

solely for determining whether a break in service occurred.^[4][8]

They are not automatically:

• 501 hours toward an ordinary year of service
• 501 hours of benefit accrual
• 501 hours toward an employer allocation.

The rule protects continuity.

It does not manufacture a year of ordinary work.

The Credit Can Move to the Next Year

Section 411 provides that the maternity/paternity hours are assigned:^[4]

• to the year the absence begins if needed to prevent a break in that year
• otherwise to the immediately following year.

That avoids wasting the special credit in a period where the employee already had enough hours to avoid a break.

Military Leave Is Different

USERRA reemployment rights go further than the limited maternity/paternity break-prevention rule.

IRS states that a properly reemployed employee returning from qualifying military service generally must receive:^[8]

• vesting credit for the absence
• benefit credit
• employer allocations the participant would have received, subject to applicable rules
• opportunity to make up employee contributions or deferrals.

Do not use the 501-hour maternity rule for military leave.

Different statute.

Different protection.

Elapsed Time Uses a Different Break Concept

An elapsed-time plan does not ordinarily ask whether the employee had 500 hours.

Treasury regulations define a one-year break under elapsed time generally as a 12-consecutive-month period:^[7]

• beginning on the severance-from-service date or an anniversary of it
• during which the employee completes no applicable hours of service for the employer or employers maintaining the plan.

INV-095 explains elapsed-time service more broadly.

Example: Return Before One Year Under Elapsed Time

Employee severs employment:

April 1, 2026

Employee returns and performs an hour of service:

February 1, 2027

The worker did not complete a full 12-month severance period with no service.

That is materially different from an employee who remains away beyond the April 1, 2027 anniversary.

Do not import the 500-hour calculation into an elapsed-time plan.

The LTPT 500-Hour Rule Is Not the Ordinary Break Rule

INV-094 covers long-term part-time employees.

For LTPT eligibility, 500 hours can be enough to make a 12-month period count toward the special eligibility sequence.^[12]

Under the ordinary break rule, 500 hours is still no more than 500 and therefore falls within the break threshold.^[4][5]

Those statements can both be true because the rules serve different purposes.

The Same Number Can Point in Opposite Directions

Consider an employee with exactly:

500 hours

in a 12-month period.

Depending on the question:

Ordinary one-year break rule

500 hours can be a break.^[4][5]

LTPT eligibility

500 hours can satisfy a qualifying low-hour period under the special rule.^[12]

LTPT vesting

Section 401(k)(15) modifies the ordinary Section 411 break language for applicable LTPT vesting by substituting an at least 500 hours standard.^[12]

Do not build one universal:

500-hour status

field in the benefits system.

Store the rule being applied.

Break Rules Do Not Override the Plan Document in One Direction Only

Federal law sets limits on what the plan may do.

The plan can be more generous.

A plan can:

• count service that federal law would permit it to disregard
• waive a holdout
• restore participation faster
• provide more favorable vesting treatment.

Once the document promises that treatment, the sponsor has to administer it.

The Code's maximum permitted break rule is not automatically the plan's chosen rule.

Related Employers Can Preserve Service

INV-090 and INV-091 explain employer aggregation.

A worker can leave:

Company A

and immediately begin work for:

Company B

while both companies are treated as one employer under controlled-group or affiliated-service-group rules.

Payroll can show termination and rehire.

Retirement-plan law can require the service to be treated across the statutory employer group.

Before recording a break, ask whether the employee actually stopped service for the employer group.

Leased Employee Service Can Matter Too

INV-092 explains Section 414(n).

If a worker is treated as a leased employee for the relevant qualification rules, service through the leasing arrangement can affect:

• eligibility
• vesting
• break analysis.

The recipient cannot assume:

off payroll = no service

without resolving worker and employer status first.

Rehire Errors Can Become Missed-Deferral Failures

Suppose a participant should have reentered immediately but HR treats the person as a brand-new hire and imposes a new one-year waiting period.

The employee misses the opportunity to make 401(k) deferrals.

IRS treats exclusion of an eligible employee as a qualification failure.^[10]

Correction can require analysis of:

• missed deferral opportunity
• missed match
• employer contributions
• earnings
• correction timing.

A rehire mistake can therefore become a contribution correction.

The Rehire File Needs Historical Data

For every returning employee, preserve:

A new-hire form contains almost none of this.

The Three Break Rules to Keep Separate

The rules overlap in vocabulary.

They should not be collapsed into one rehire policy.

Frequently Asked Questions

How does the 401(k) one-year break rule work?

Under the ordinary hours-based rule, it generally means a designated 12-month computation period in which the employee completes no more than 500 hours of service.^[4][5][7]

Does quitting create a break in service immediately?

No. Termination and break in service are different concepts. The ordinary break is measured over the plan's applicable computation period.

Is exactly 500 hours a break?

Yes, under the ordinary rule. The standard is no more than 500 hours.^[4][7]

Is 501 hours a break?

Generally not under the ordinary hours-based definition because 501 is more than 500.

Can eligibility and vesting have different break periods?

Yes. Eligibility and vesting can use different designated computation periods.^[5]

If I am rehired, does my prior service disappear?

Usually not automatically. Federal law generally requires prior service to be counted unless a specific exception permits it to be disregarded.^[3][6]

Do I always reenter the 401(k) immediately after rehire?

Not in every plan. Prior participation, whether a break occurred, eligible class and plan break provisions matter. A plan can use a permitted one-year holdout after a break.^[2][3][6]

What is the one-year holdout rule?

It permits a plan to temporarily disregard pre-break eligibility service until the returning employee completes a year of service after returning.^[2][3][6]

Does the holdout permanently erase the old service?

No. When the employee completes the required post-return service, the pre-break eligibility service is restored under the applicable rule.^[2][6]

What is the rule of parity?

It can permit a plan to disregard specified pre-break service for a participant with no vested employer-derived benefit when the uninterrupted break period equals or exceeds the greater of five years or the participant's pre-break years of service.^[3][4]

Does five years away always erase prior service?

No. The parity rule depends on vesting status and prior service. Other five-break rules have different effects.

Does parity apply if I was partly vested?

The nonvested-participant parity rule requires no nonforfeitable right in employer-derived benefits. A partially vested participant is different.^[7]

Can five breaks freeze vesting on my old employer account?

For a defined contribution plan, a separate five-consecutive-break rule can limit the use of post-break service in determining the vested percentage of employer benefits accrued before the break.^[4][7]

Can unvested employer money be forfeited when I leave?

Depending on the plan, nonvested amounts can be forfeited after a cash-out or after an extended break period.^[1][11]

Can forfeited money ever be restored after rehire?

Yes. When a plan uses the applicable cash-out/forfeiture provision, federal rules can require restoration if the participant returns and timely repays the distribution under the plan's repayment terms.^[11]

Does maternity or paternity leave count as 501 hours of service?

Up to 501 hours can be credited solely to keep the break threshold from being triggered. That is not a general grant of 501 hours for every plan purpose.^[4][8]

Does military leave use the same 501-hour rule?

No. USERRA provides separate reemployment protections that can require broader vesting, benefit and contribution credit.^[8]

How does elapsed time treat a break?

Under elapsed time, the rule generally uses a 12-month period of severance with no applicable hours of service rather than the ordinary 500-hour test.^[7]

How can 500 hours be both a break and an LTPT qualifying year?

Because the statutes use 500 hours for different purposes. Under the ordinary break rule, 500 is within the no-more-than-500 threshold. Under LTPT eligibility, 500 can satisfy the special low-hour qualifying period.^[4][12]

What if my employer incorrectly made me wait after rehire?

If the delay violated the plan's eligibility rules, the plan can have a qualification failure requiring correction for the missed deferral opportunity and related contributions.^[10]

The Rehire Decision Sequence

When an employee returns, answer these questions in order:

1. Was the person already a participant?
2. Did the employee actually incur a one-year break under the correct computation period?
3. Was any employer-funded benefit vested at departure?
4. Does the plan use the one-year holdout?
5. How many consecutive breaks occurred?
6. Can the rule of parity apply?
7. Does the separate five-break vesting rule affect pre-break employer contributions?
8. Was a vested balance distributed and a nonvested amount forfeited?
9. Does the employee have a repayment/restoration right?
10. What is the correct reentry date?

Do not begin with:

new hire or rehire?

Begin with:

what service survived?

Sources & References

1. IRS: Retirement Topics — Vesting
2. IRS Publication 6088: Defined Contribution Plan Listing of Required Modifications
3. 26 U.S.C. §410: Minimum Participation Standards
4. 26 U.S.C. §411: Minimum Vesting Standards
5. 29 CFR §2530.200b-4: One-Year Break in Service
6. 26 CFR §1.410(a)-5: Year of Service; Break in Service
7. 26 CFR §1.411(a)-6: Breaks in Service for Vesting
8. IRS: Reemployment After Military Service or Maternity/Paternity Leave
9. IRS: 401(k) Plan Qualification Requirements
10. IRS: 401(k) Fix-It Guide — Excluding Eligible Employees
11. 26 CFR §1.411(a)-7: Definitions and Special Rules
12. 26 U.S.C. §401: Qualified Plans — LTPT Special Rules

Educational Disclaimer

ROIStreet publishes educational content about retirement-plan service, eligibility, vesting and reemployment. This article is not legal, tax, employment, fiduciary or plan-administration advice. Break-in-service treatment depends on the plan document, service-crediting method, computation period, vesting status, distribution history, employer structure and current law.

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