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Merger of Plans - Merger of Vesting Schedules?

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Company A acquires Company B. Each has a 401(k) plan. Company B's 401(k) Plan has 100% vesting of employer contributions. Company A's 401(k) plan has a vesting schedule for employer contributions. Now, Company A wants to merge the Company B 401(k) plan into its 401(k) plan. I know that Company A cannot reduce the vested percentage of employer contributions in Company B's 401(k) plan prior to the merger date (ala Sec. 411(a)(10)(A) and that a participant with at least 3 years of service has to be given an election to remain on the old vesting schedule (ala section 411(a)(10)(B)). My questions are: (1) would the merger be treated as the amendment of Plan B so that participants with at least 3 years of service can elect to remain with the 100% vesting for employer contribuitons under the Company A 401(k) Plan? (2) For those participants with less than 3 years of service, or if the answer to (1) is no,for all participants, could Company A subject the Company B employees to its vesting schedule for all future Company A contributions to its 401(k) plan (while retaining the 100% vesting of the Company B 401(k) Plan account up to the date of the plan merger)?

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Does anyone have any thoughts on this issue? I believe it should be possible to retain the old vesting schedule for the accounts merged in and apply the surviving plan's vesting schedule to the accruals under the surviving plan.

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Guest Beth N

I think the answer to (1) is yes. The question is whether a plan "merger" is a plan "amendment" which will implicate 411(a)(10). Using the analogy to 411(d)(6) protected forms of benefit, that section on its face applies to "plan amendment" and the IRS has clearly applied it in merger situations. e.g. Rev. Rul. 94-76. Thus I think you can argue that a plan merger is an amendment to which the 411(a)(10)(B) election rule must apply.

For Question (2) I think the Employer A clearly can apply the Plan A vesting schedule to all participants not grandfathered as described under Q(1). I have a twist on this question, though. If Employer A wanted to keep the more favorable vesting schedule for Employer B's employees (assume they're a sub of A, in A's controlled group), could it? I suspect it could, but that it would be a separate benefit, right or feature to be tested under 401(a)(4). Any thoughts?

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Guest carsca

As a follow up question: As a result of the merger, is the buyer now required under Code section 414(a)(1) to credit service with the seller for purposes of vesting contributions under the buyer's plan?

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I'm not sure if I understand what carsca is asking, but I think the answer is no.

My CCH book shows no IRS regs. (or proposed regs.) under IRC 414(a). Not sure if it might be covered in some other reg.

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Guest carsca

Pax,

Thanks for your response. Let me try to clarify my question.

Section 414(a)(1) of the Internal Revenue Code provides that "in any case in which the employer maintains a plan of a predecessor employer, service for such predecessor employer shall be treated as service for the employer."

Section 414(a)(2) of the Internal Revenue Code provides that "in any case in which the employer maintains a plan which is not the plan maintained by a predecessor employer, service for such predecessor employer shall, to the extent provided in regulation prescribed by the Secretary, be treated as service for the employer."

As you noted, there are no 414 regs. Thus 414(a)(2) does not apply.

However, in the instance case 414(a)(1) should apply. Once Company A merges the Company B 401(k) plan into its 401(k) plan, Company A should credit prior service with B for purposes of (at least) vesting.

Agree?

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Guest Kurt_Johansen

I agree with Beth N's analysis on this issue but have need to take it a step further. Suppose a company (Company A) with a defined benefit pension plan (Plan A) with a 5 year cliff vesting schedule acquires another company (Company b) with a DB pension plan (Plan b) with a 6 year graded schedule. Plan B is frozen in September and Plan B participants are allowed to participate in Plan A. At this point, I doubt anyone would argue that Plan B participants are required to be granted the choice of the 6-year graded schedule, (but argue with me if you disagree). In December, the plans are merged. Do we have to go back and give Plan B participants a choice of the 6 year graded schedule if they had 3 years of service? If they had 2 years of service and were therefore 20% vested in Plan B benefits do we have to immediately vest them 20% in Plan A accruals? What about anybody who terminated in between September and December? What if the plans had been merged 1 year after Plan B was frozen and participation began in Plan A? 2 years? 2 weeks?

this seems like a real gray area and I would be very interested in Beth N's opinion or anybody elses

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Let's take a look at the flip side: Company B's 401(k) plan has 100

% vesting. Company A's 401(k) plan has a graded vesting schedule. If employees from Company A transfer to Company B and some are either not vested or not fully vested, can their vested portion, if any, be transferred to Company B and the rest subject to forfeiture? Does it make any difference if Company B and Company A are in the same controlled group?

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