Who are "affected participants" entitled to full vesting when a DB plan is terminated? Obviously, active participants who are not yet fully vested must become fully vested. What about the following employees:

(a) Former employee who terminated with zero vesting.
(B) Former employee who terminated with partial vesting and is not in pay status.
© Former employee who terminated with partial vesting and is receiving an annuity.

Thanks.

Generally, I handled plan terminations by vesting any employee who terminated during the past 5 years (not currently in pay status). Therefore, I would 100% vest a) and b) but NOT c).

Depends on plan provisions.

As I recall, the "five-year rule" is an outgrowth of an IRS GCM (General Counsel's Memorandum) and focuses specifically on defined contribution plans. (Probably MGB will give us the exact details.)

The net effect of that GCM was to imply that all participants who terminated in the five years preceding a plan termination with less than 100% vesting should be given 100% vesting upon plan termination. The reasoning was that, if the employee had been rehired anytime within 5 years following his severance of employment, then he would again begin to earn vesting service.

In true bureacratic fashion, this ignored a couple of obvious problems: if the employee had died, rehire seems unlikely; if the company ceased to exist, rehire also seems unlikely. OK, I'll get down off my soapbox.

The typical way of avoiding this issue now seems to be to include in the plan document two provisions:
- automatic cashout of vested benefits below the limit ($5000), and
- statement that any participant who severs employment non-vested will be deemed to have received (immediately) the entire amount of his "vested benefit". (So called "deemed cashout provision.) BTW, this probably also means that the plan should state that individual has a "deemed repayment" if rehired.

If you have these provisions in your plan, then the only terminated employees who get 100% vesting upon plan termination would be those who severed employment during the plan year in which the plan termination occurs.

This assumes there is not also a partial termination which could extend 100% to others.

Just to clarify Pax's comment on the non-vested terms: most documents put the "deemed payout" language in place (we use Corbel/Relius which has had this since before TRA '86) so that you are safe in ignoring any participant who terminated with no vesting rights in the last 5 years preceding the year of termination. As far as the partially vested terminations in that time, if they were paid out their lump sum, then again you should be safe. However, you may be challenged in the course of the IRS's DL review if you cashed all of these folks out in the year of plan termination. You really only need to focus on partially vested terminations in that time period (and remember you need to provide an attachment to Item 15 of Form 5310 listing all partial and non-vested terms anyway so the IRS will be reviewing your decision).

As an aside, Pax is correct about the 1984 GCM that started this whole thing (in fact, it arose from REA's extension of the 5 1-Year Breaks in Service before you could drop service; during the mid-80s you focused on whether a participant's termination occurred pre or post 8/23/84 to see if full vesting was required). However, the 5 year rule only applies to DC plans; actually for DB plans there is no corresponding provision "forfeiting" the non-vested portion of the accrued benefit if someone terminated with non-zero vesting. By the logic of the GCM, you really should have to fully vest ANY partially vested terminated participant from day one of the Plan. Fortunately, the IRS never actually crawled out to the end of this branch of thought for this result!