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Mr Bagwell

Vesting -- Rehired Employee

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A participant was hired at a time when the Plan was immediate vesting.  The participant was gone for 20 years and rehired after a vesting change to a 2-25.  Participant left money in the plan and is the funds are 100% vested.

The question and debate is whether the employee is subjected to the new schedule of 2-25, OR, because she was originally hired under the Immediate, she is subjected to the immediate schedule.

We know her existing funds are 100% vested.  No issue there.

I lean that she is under the old Immediate schedule....

What say you? 

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What are your break in service/plan vesting rules in the plan?  If it says nothing,  I would lean towards your case that she is immediately vested -- unless she is an HCE and if so, then you have to be even more careful.

Side question - does your admin/recordkeeping system even allow for two different vested %s on employer moneys?   If she still has old employer money, how are you going to separate that from new employer contributions? Or would you have to setup a whole new money type?  Might be easier to amend the plan if it is silent on rehire vesting than to set that up for a few participants.

Edited by hr for me

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It is my understanding (for what that's worth) that someone who is 100% vested is 100% vested thereafter, and that a break during which the vesting schedule is made more stringent would not, upon reinstatement, lead to new accruals being vested at less than the 100% already attained.  It is also my understanding that HCE status and vesting requirements are completely unrelated.  Why would care be needed if the rehired person is an HCE?  Vested is vested without regard to HCE status.

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BIS rules.... the plan has much to say about break in service and vesting.  And clearly the participant had a five year break in service.  The dollars were 100% vested so forfeiting nonvested funds is not an issue.

We don't find anything that would allow for a cut back on the participants vesting schedule.

We use Relius.  The recordkeeping of old money and new money is always a challenge.  I don't think a new source was created.  I think the method we chose was put everyone prior to the change on the secondary vesting schedule for match witch is 100%.  The new schedule for match became the primary schedule at 2-25%.

Edited by Mr Bagwell

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Unless the amendment says something about rehires-- which it should in my mind.  I would go with 100% vested.  To me this is a risk/cost thing.  How much is it really going to cost the company to vest this person upon rehire vs getting called out on it? 

Here is the thing it is done often for practical reason but I believe you could amend a plan to say all funds in a persons account as of a given date is vested on sch #1.  All funds earned after that date are on Sch #2.  The rules only talk about not taking YOS away not how the YOS are applied to any given sch.  So if the amendment was drafted to say rehires after this date new money is on sch #2 could be defended.  It is the fact the amendment appears to be silent that you are stuck. 

The real moral of this story is spend more time drafting your amendments to think of this kind of fact patterns. 

 

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I agree the restatement should have been more clear on the rehires.

I'm at the bottom of the food chain..... sometimes I get asked for an opinion, sometimes I don't.

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there is, of course the following rule in the regs which wasn't mentioned above.

This one was buried deep in the recesses of my thick skull, even blowing the dust off took more work than I care to think about.

I am quoting from the FT William basic document though other documents should be similar

 

If the Plan's vesting schedule is amended, or the Plan is amended in any way that directly or indirectly affects the computation of the Participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to or from a Top-Heavy vesting schedule, each Participant with at least 3 Years of Vesting Service with the Employer may elect, within a reasonable period after the adoption of the amendment or change, to have the nonforfeitable percentage computed under the Plan without regard to such amendment or change. For Participants who do not have at least 1 Hour of Service in any Plan Year beginning after December 31, 1988, the preceding sentence shall be applied by substituting "5 Years of Vesting Service" for "3 Years of Vesting Service" where such language appears. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of:

(1) 60 days after the amendment is adopted;

(2) 60 days after the amendment becomes effective; or

(3) 60 days after the Participant is issued written notice of the amendment by the Plan Administrator.

The election provided for in this Section 13.01 shall be made in writing and shall be irrevocable when made.

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How many YOS (for vesting) did the rehired employee have when they left?

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Potentially 3 year of service for vesting.  I say potentially because the plan document prior to 2-25% vesting did not define year of service....everything was 100% vested.

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The BIS/rehire rules relate to whether or not prior vesting service (not %) is retained. In this instance it is clearly retained because the person had a nonforfeitable right upon termination of employment (assuming no one-year holdout, or if so, already satisfied). Now that vesting service is restored, what schedule to apply? Now Tom's comment comes into play - if person had sufficient service to choose (or if not given choice then defaults to better schedule). If plan did not define YOS - really? must have been a very old plan - then look at current definition, because it must include service for vesting prior to the effective date of latest restatement. Of course getting hours from more than 20 years ago if that is how defined now is another story, in which case I'd make an educated estimate and go from there.

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I have a question about the participant's selection of the vesting schedule.  I thought that applied at the time the amendment is made.  In this case, what if the amendment was made 5 years ago, and the person got rehired last year.  Do they get to select the vesting schedule?

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I think that if the person had been 100% vested on the old schedule, no election is needed, since being 100% vested would have to be protected.  3 years or no 3 years.

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The ERISA Outline Book (Chapter 4, section III Part F) has:

2.g.What if old schedule is better at all points? Suppose the employer is amending a very liberal vesting schedule into one that would be less favorable at all points to all present participants. In that case, the vesting schedule election does not have to be provided. The present participants (or at least those with at least 3 years of service) would be kept on the old schedule because there would be no reason for them to elect the new schedule.

 

which seems to reiterate the 3 year rule. must be like when food falls on the floor, there is a time period when it is still edible or has to be pitched.

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"...which seems to reiterate the 3 year rule. must be like when food falls on the floor, there is a time period when it is still edible or has to be pitched."

That's what the micro-organisms want you to think!

And I am pretty sure that under no circumstances can a participant's current vesting percentage be reduced.  So anyone already 100% vested stays 100% vested.

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We are going with the 100% vested.

I enjoyed the dialogue and knowledge gained.  I must be strange!! Or proves it even more.....

Thanks all!

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$0.02, please re-read the above and say out loud: "3 year rule".  Because I'm just as confident that if a participant has less than 3 years, the vesting schedule can be reduced. I *think* the way it works is that the vesting schedule change results in a 411(d)(6) protected benefit of 100% times accrued benefit (or account balance) on the day the vesting schedule changes.  And just to clear up some confusion, a change in law "way back when" eliminated the ability to provide for class year vesting schedules, so I'd be very careful before implementing a change that even smells like a class year vesting schedule.

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just to clarify. any old $ accrued would remain  under the old vesting schedule - those are protected . it is just the new $ become subject to the new vesting schedule, so you do have to be careful about amending a vesting (e.g. setting up an additional source to track things). the examples 3 and 4 in Treas. Reg. § 1.411(d)-3(a)(4)  use the terms "further vesting protections on benefits accrued as of that date." and "for those account balances and earnings."

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It has been pointed out to me that the controlling regulations under 1.411(a)-8(a) can be (should be?) interpreted to support $0.02's statement that a participant's vesting %-age can not be reduced.

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