What are the post-rehire rules from the final automatic contribution arrangement regulations, and how do they differ from the definition of a break-in-service?
Rev. 06/26/09; E-mail Alert 2009-9

Automatic Contribution Escalator and Rehires
A plan may have a provision stating that for rehires who have no service for an entire plan year after severance the automatic contribution escalator may be reset upon rehire so that the employee is starting off at the first step of the escalator (for example at 3%) regardless of how high on the escalator the employee had been before severance; if the plan document is written to specify this.

Note that if a rehire is gone for less than a full plan year, then the termination is ignored for purposes of the escalator.

Example 1
Joseph is a participant in a calendar plan year 401(k).
He entered the plan February 1, 2010.
His severance of employment date is March 26, 2011.
Joseph is rehired November 25, 2012.
Since Joseph was not absent from employment for a full plan year, for the purpose of the automatic contribution escalator, Joseph resumes service as if he had never left.

Example 2
Abraham is a participant in a calendar plan year 401(k).
He entered the plan on April 1, 2010.
His severance of employment date is December 30, 2010.
Abraham is rehired January 3, 2012.
Since Abraham was absent from employment for a full plan year, for the purpose of the escalators, Abraham may be treated as a new hire for purposes of the escalator. This is an optional plan provision.

Permissible Withdrawal Rules and Rehires
Similar to the rules for the escalator, if a rehire is away for more than one full plan year, then they are eligible to be automatically enrolled and to have a new right to a permissible withdrawal.  A post-rehire permissible withdrawal is limited to post-rehire default deferrals. This is an optional plan provision.

Absent For Full Plan Year Versus Break-in-Service
The final automatic contribution regulations rehire scenarios use a concept of being absent from employment for a full plan year. This is a concept that could run — as it did in our examples, from as little as 12 months and a few days to almost two years — or, of course, to many years.  A break-in-service is defined somewhat differently. Under the elapsed time method, a one-year break-in-service occurs on the anniversary of the date that severance from employment occurred. With the hours-counting-method, a one-year break-in-service occurs when there is a 12-month period (again measured from date of severance) during which 501 hours of service did not occur. A break-in-service is used in a variety of circumstances such as measuring vesting service, eligibility (especially rehires and 2-years of service eligibility), and distributions after severance.   

Bill Grossman, ERPA, QPA