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Eligibility: Application of Rule of Parity


Guest Sieve

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An individual was a plan participant and was vested when she terminated employment after 3 years on the job. She made no deferrrals, and there were no employer contributions allocated to her account--therefore, she never had an account balance (i.e., she had an accrued benefit of $0, in which she was 20% vested). She then was rehired 10 years later.

I assume that means she is a "nonvested participant" (as defined in IRC Section 410(a)(5)(D)(iii)) and therefore subject to the rule of parity (IRC Section 410(a)(d)(D)). Agreed?

Or, does (iii) mean that she is not "nonvested" because she has a nonforfeitable right to an accured benefit and it's just that this particular accrued benefit turns out to be $0? In other words, does the answer turn simply on whether she is vested or not vested, with the question of whether or not there's an account balance being immaterial? (The latter argument falls apart if you consdider employee deferrals, because an individual is always 100% vested in deferrals, and that argument would therefore cause an individual never to be nonvested once eligible to defer.)

Thoughts/comments?

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Seems to me that generally, if you have 5 or more consecutive one-year breaks in service, then the years of service after the rehire (after the 5 or more one-year breaks) do not count for vesting during the first employment (before the breaks), but the years of service before the breaks do count for vesting after the rehire. (And a special rule applies if you were 0% vested during the break years.)

In this case, she will forever be 20% vested in $0 for the pre-break period, and she will start at least 20% vested when rehired. (or am I missing something?)

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this is from this years Q and A (They must have known you would ask this question)

Does the rule of parity for vesting permit the disregarding of years of service

for a rehired participant who was nonvested at termination in employer

contributions but had salary deferrals? What about someone who made no

deferrals but could have?

If there is a vested amount, prior service cannot be disregarded, even if the vested account is

attributable to deferrals. IRC 411(a)(6)© and (D). However, if there is a vested percentage,

but no vested amount (i.e., no deferrals made in this example), the rule of parity does permitprior service to be disregarded.

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Actually, GMK, my question related to the application of the rule of parity for eligibility purposes (rather than vesting--although I think they'rethe same), and whether being vested, but with no account balance, means that the individual is a "nonvested participant" and therefore no prior years of service can be ignored when determining eligibility upon rehire (i.e., all prior years of service must be considered).

Tom--Is that the proposed answer presented to the IRS, or is it the IRS's answer?

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Thanks, Tom. I assume that the answer is the same for eligibility (which is my question), since the vesting rule of parity referred to in the IRS response (IRC Section 411(a)(6)(D)) is virtually identically worded as the eligibility rule of parity (IRC Section 410(a)(5)(D)).

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  • 3 months later...

In the IRS' answer that was posted, there is a reference of "vested amount" ("If there is a vested amount, prior service cannot be disregarded......"). What if the individual took a distribution of this vested amount after they terminated? Are we looking at the vested amount as of the day they terminated or the day they were rehired in order to determine if the rule of parity applies?

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I'm sure that the existence of a vested amount is determined at any time (i.e., if there ever was a vested amount). Surely, however, the vested amount does not have to be present at rehire.

I have another twist. Tripodi says (and Corbel's document confirms) that the rule of parity applies only to a "participant" in the plan (as per the Code). Therefore, if an employe terminates employment before a particular plan is adopted, and is rehired after the plan's adoption, the rule of parity does not apply (since the individual was not a participant in that specific plan), and no prior service can be disregarded. Although I undertstand the argument, it doesn't make sense to me from a logical perspective (I know!! Why consider logic??)--it means that someone who has the misfortune of being in the plan but not deferring (and having no vested account balance) may have y/s of service disregarded, but the emoployee from long ago, who was never in the plan because it did not exist at that time, will not have y/s disregarded. Any thoughts?

And, what if the rehired individual was in the old MPPP but terminated nonvested before the adoption of the new 401(k)/PSP? Is that individual a "participant" whose y/s can be disregarded when it comes to eligibility for entry into the new plan?

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I agree, applying these rules to the many possible scenarios sometimes creates non-logical results.

It seems to me that your rehired employee in the MPP and subsequent 401(k)/PSP scenario would not have their service disregarded since the rule of parity woud not apply (because the employee was not previously a "participant" in the 401(k)/PSP). I still, though, am not saying that this makes sense logically!

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