Fully Vesting only Active Employees

[401QUE]

Can an employer amend their tiered-vesting match to give immediate 100% vesting to only actively employed participants' balances?  Put another way, can an employer make all match balances for only active employees 100% vested, while keeping termed participants on the existing tiered vesting schedule?  Note this full vesting would be on existing balances as well as future match contributions for active employees.  I'm a bit rusty on protected benefits but don't immediately see where any accrued non-forfeitable benefits are being reduced in any way.  Any insights and guidance are most appreciated, as always!!  Thanks! 

[12AX7]

Yes you can.  The amended vesting schedule would only apply for participants that have service as of the date the schedule was amended.  There is no cutback for the participants that are not currently in service.

[My 2 cents]

Watch out for the amendment timing issue in the non-discrimination regulations, however.  If the amendment follows a substantial cutback in rank and file employees, it could be considered discriminatory on a facts and circumstances basis.

[12AX7]

Where is the potential cutback for former employees?  Anyone currently employed would be 100% vested according to the OP?

[ESOP Guy]

The issue raised wasn't a cut back but discrimination.  Although a large enough reduction in force would most likely result in a partial termination and 100% vesting of those people. 

[My 2 cents]

I did not mean cutback as applied to any specific employee.  I meant substantial reduction in number of active non-HCEs.  401(a) issue, not 410 or 411 issue.  Sorry if I was not clear.

[12AX7]

Ok, your concern was for partial termination issues which is perhaps another matter that is separate from the original question.  To the best of my knowledge, I don't believe partial termination is a nondiscrimination issue.  Partial termination would be based more on the percentage on employment terminations during a period of time.  Is that correct?

[ESOP Guy]

You are still not getting it.  Let's say there is a reduction in force that effects only NHCEs but isn't large enough to be a partial termination.  Then you make actives 100% vested.  There is a facts and circumstances part to the nondiscrimination rules that you need to be concerned about.  This can look like you vested after removing a large number of NHCEs from employment and then targeted a group that includes the HCEs to become 100% vested.

It strikes me as a rare set of facts but My 2 Cents raises a valid issue.  If nothing else the optics could raise more questions then it is worth. 

[K2]

1-104(a)(4)-5(a)(2) addresses the timing of a plan amendment and whether it's discriminatory.  If you have a chunk of NHCEs leave active status and then you do an amendment that just improves vesting for the actives, you should at least consider this requirement.

 

(2)Facts-and-circumstances determination. Whether the timing of a plan amendment or series of plan amendments has the effect of discriminating significantly in favor of HCEs or former HCEs is determined at the time the plan amendment first becomes effective for purposes of section 401(a), based on all of the relevant facts and circumstances. These include, for example, the relative numbers of current and former HCEs and NHCEs affected by the plan amendment, the relative length of service of current and former HCEs and NHCEs, the length of time the plan or plan provision being amended has been in effect, and the turnover of employees prior to the plan amendment. ..... 

[401QUE]

Thank you so much!!!!   Now comes the fun part of having the giant record keeper properly implement it, by way of creating a new Match source for the terms.  Have yet to see how the SPD lays this all out...  The responses are much appreciated!