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Vesting Amendment - 3 years of service required to get election rights


Guest Ducks

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Seeking advice about vesting amendment from 100% immediate to 3 yr cliff.

Say this is done 12/1/2004 - calendar yr = plan year .... all computation periods = plan year where applicable. Yr of service = 1000hrs not elapsed time method. Would this suggest the following?

* All p/p's with 3 or more yrs of service through 2004 plan year end can elect to stay on the 100% vested immediate schedule for all contributions (applicable to the source the amended schedule applies) made through plan years up to and including 2004?

* Do new contributions for 2005 and future years of same source have to be recordkept under old schedule for only those that met the three yrs of service rule - OR could new schedule apply to new contributions irrespective of the grandfathered schedule for certain 3 yrs of service people applicable to those benefits accrued through adoption of vesting amendment?

Thoughts are appreciated.

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If the old schedule didn't apply to future contributions for those with 3 years, then there would be no point in having that rule. (But the question is probably moot since if they had 3 years of service for vesting they already met the 3-year cliff requirements.) But, I have heard that the IRS will argue that it's the vesting percentage that is protected for all participants at the time of the amendment not the vested balance. That interpretation would call for every current plan participant to be fully vested in all current and future contributions. Only new participants could have vesting applied. Of course with a 3-year cliff there are probably only a few people that are participants with less than 3 years of vesting service anyway.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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Although I'm sure it happens, why would they? The employer should be able to change the vesting schedule however they see fit at any time (assuming the vested benefits are not decreased of course, and all other rules related to changing vesting). How can you protect a benefit that doesn't exist???

I think an overriding concept that most of the IRS espouses is that if you can do it in 2 plans, why not let them do it in one plan (i.e., restructuring for nondiscrim, or testing based on otherwise excludables, or new comp plans for that matter with separate allocation groups)? So if you could start a new plan and accomplish your goal (which I can't believe anyone would dispute), why not let them do it in the current plan?

Austin Powers, CPA, QPA, ERPA

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I've heard the same thing as Blinky - the schedule applies to the source. Thus, once they are 100% vested, they are 100% vested in all old and new contributions.

Yes, if you could do it in 2 plans it makes sense that you be allowed to do it one. But, that concept isn't always true.

Also, as far as the issue on the source, the only exception I've seen is under EGTRRA. The law specifically provided that the more restrictive matching schedules could be applied to just new contributions. Of course b/c of the administrative headaches, not many people used that provision.

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I think an overriding concept that most of the IRS espouses is that if you can do it in 2 plans, why not let them do it in one plan (i.e., restructuring for nondiscrim, or testing based on otherwise excludables, or new comp plans for that matter with separate allocation groups)?

There are many instances where the IRS does not apply this concept. A quick list is TH, balances that trigger 404(a)(7), amendments to a PS allocation formula when the right to the allocation is accrued during the year.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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Reg. 1.411(a)-8T(b) provides that if the vesting schedule is amended, those employees with 3 yrs of service can elect to apply the former vesting schedule to the accrued benefit derived from employer contributions. The vested benefit % of employees with less than 3 years of service can be reduced by a plan amendment.

mjb

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I'm starting to come around to ya now after reading the ERISA Outline Book. It sounds like Congress is actually on my side, but the treasury has decided to ignore congress' intent (see page 4.20something of the 2004 ERISA Outline Book).

I still think it's stupid. Not that that means anything...

Austin Powers, CPA, QPA, ERPA

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First of all I can assure that I think it's stupid :P. The sponsor can just terminate the plan if they want. So if they can terminate the plan altogether (much more detrimental to the financial well being of the participants) then why not allow them to slightly decrease the level of FUTURE benefits.

Austin Powers, CPA, QPA, ERPA

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Thanks for all the replies.

I'm still confused about something.

Say former schedule was 100% immediate and employer would like the same source to vest under 2/20% going forward.

Do I understand all of these responses correctly to mean that the valid approach here is to never ever take away vesting from someone once it has been obtained - and that this is the case regardless of years of service?

Or, could this new schedule reduce the vested benefit for those who do not already have 3 years of service at the adoption of the amendment? So, for someone with 2 years they are actually going from 100% to 20%...

Is this correct?

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Austin: The er can always reduce the level of future benefit accruals. However, the employer cannot set up successor plans to evade the vesting requirements of ERISA for those employees with 3 yrs of service any more than an er can set up successive DB plans to evade the 415 limits.

Ducks: You need to look at the plan document to see which participants are protected from changes in vesting schedule. Some plans protect all participants who are vested not just those who have 3 yrs of service.

mjb

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Mbozek, to your posts above, no one is disputing that if you have 3 YOS for vesting that you don't have the right to remain on the old schedule. It is the IRS' position that no matter what number of YOS you have that the vesting percentage is grandfathered, not the vested benefit.

Anyway, you could start up a new plan and exclude YOS for vesting before the effective date as long as you don't terminate the old plan. To be a predecessor plan you must terminate within the 5 years before or after the start-up of the new plan.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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Blinky: Is grandfathering required by reg 1.411(a)-8(a) which is not replicated in the temp reg (which I did not notice before)? While you can start up the new plan with longer vesting schedule without terminating the old plan, the employees will continue to vest under the schedule in the old plan.

mjb

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That appears to be the reason for the IRS' position.

While you can start up the new plan with longer vesting schedule without terminating the old plan, the employees will continue to vest under the schedule in the old plan.

As I mentioned before since the prior plan is not a predecessor plan unless it terminates within a 5 years to or fro the onset of the new plan, I don't agree with this statement. You can exclude YOS for vesting before the effective date of a plan where no predecessor plan exists. Is there another reason why you state this that I am missing?

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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So Blinky, does the following work:

Old Plan has a 4 year graded vesting schedule (25% a year). New Plan is started for new contributions only, and can exclude years of service from before the effective date of the Plan? Furthermore, New Plan can have a 7 year graded vesting schedule, and even 100% vested employees in the old plan will be zero percent vested when New Plan is started?

Let's assume Old Plan continues to have a 401k, so partial termination won't be an issue in Old Plan.

Austin Powers, CPA, QPA, ERPA

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It seems that the only advantage to establishing the new plan is that after 5 years the participants are only 60% vested in benefits under the new plan instead of 100% vested. They are 100% vested in the old plan. Q- is this saving in vested benefits worth the cost of maintaining 2 plans for 5 years and terminating old plan? It seems that the only benefit to establishing new plan is to reallocate forfeitures from participants.

mjb

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Guest Pensions in Paradise

Not to mention the politics of explaining to your employees why they are starting with 0% vesting under the new plan when they are already vested under the old plan. I'd like to sit in that meeting!!

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There are a lot of things you can do but you don't do, at least most people don't do them. I was just pointing out that it is possible. I have never seen it done. I would not recommend it without strong "you must not like your employees" caveats. I have not done many other things along these lines.

Although, one time I told a doctor that he could treat his 10 person staff as independent contractors and that he could put in a maximum DB plan for just himself. :o - just kidding, I didn't do that either.

But wait, there was that time a lawyer informed me he needed to lay someone off. There was a single 45 year-old mom with 4 kids and a 22 year-old fresh out of college. Both did the same job, so of course I demanded that he fire the older person so that the cross-testing would work better. :D - oops, I forgot that I didn't do that either.

"What's in the big salad?"

"Big lettuce, big carrots, tomatoes like volleyballs."

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