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Rule of Parity in 401k plans


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True or False:

Service can NEVER be disregarded under the rule of parity in a 401k plan, becuase the participant always has a nonforfeitable right to their 401k contributions (even if they never made 401k contributions, and even if they never had a balance in the plan).

They always mentioned "Employer provided benefit" but my understanding from somewhereorother (very reliable source!) is that this is a TRUE statement.

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Found the answer (EOB)...

2.c.1) Elective deferrals included under rule of parity for post-2005 plan years. Treas. Reg. §1.401(k)-1©(1), as amended on December 29, 2004, provides that elective deferrals are disregarded only for purposes of IRC §411(a)(2). IRC §411(a)(2) addresses only the application of vesting schedules. Thus, these regulations require that elective deferrals be taken into account in determining whether the employee is 0% vested for purposes of the rule of parity. The regulations are effective for plan years beginning on or after January 1, 2006, although the regulations may be applied, at the employer’s election, for earlier plan years ending after December 29, 2004. See Treas. Reg. §1.401(k)-1(g) (December 29, 2004).

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at the 2010 ASPPA Annual Conference the IRS expressed the following opinion

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 permit

prior service to be disregarded.

it should be remembered, of course that such opinions might not reflect an actual Treasury position, though the IRS personal do look at the questions beforehand.

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