Topps_52311

Vesting on added Profit Sharing Plan

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Company A wants to add a profit sharing element to the existing 401(k) plan.  They want the vesting date for the profit sharing to be different from the employer match piece. The want the vesting date to begin on the effective date of when the profit sharing element is added and exclude all prior years of service.  Reading Section 411, I don't think they can do that but they think they should be able to. Would help hear thoughts on this?

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They can't exclude service prior to a specific plan element only prior to the adoption of the plan and only then when it's first effective.

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Check your current document. A 401(k) arrangement is an additional FEATURE added to a profit sharing plan, even though commonly referred to as a "401(k) plan." Most 401(k) plans PERMIT a profit sharing contribution already, even if they do not utilize it.

If they want to establish a new Profit Sharing plan on top of their existing PS/401(k) plan, yes, they can do that, and they could exclude service, for vesting purposes, prior to the effective date of the plan. I don't know the situation - with modern relatively short vesting schedules, unless they have a lot of employees, a lot of turnover, and substantial contribution levels, it is hard to see how the added expense of maintaining another plan is justified - but perhaps it is. Others here may offer some better insights.

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Skinning the cat by adopting a separate profit sharing plan is a perfectly legitimate option here.  I agree that the demographics need to be right to justify the added expense, but if they are I think the employer's motivation to start the vesting clock all over again makes sense.  

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Better review the successor plan rules to ensure there are no surprises.

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Yes, the predecessor plan rules would kick in if the existing plan was terminated within five years after the new profit sharing plan is established. 

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Thank you all for the input.  Very helpful.  Based on the input, I am understanding that, if the PS is part of the existing 401(k), then they cannot exclude YOS.  However, they can add a new PS plan and exclude YOS then.  If they terminate the existing 401(k) plan within 5 years, then the current 401(k) vesting rules would apply...

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... retroactively.  Good luck with that.

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For so long as they intend to maintain a plan that gives employees an elective deferral opportunity, as a practical matter they can't terminate that plan.  Also, although I don't think the regulations address this, I would be nervous about the application of the predecessor plan rule if that plan was ever merged into the new plan.  So, if a fresh vesting clock is important, the employer will have to play by the rules and maintain two separate plans.

 

 

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Could they merge the plans a year down the road and end up with the result they wanted and a single plan?

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I am now looking at the 401(k) Profit Sharing Adoption Agreement proposed.  Where the reinstatement effective date is today, the initial effective date of the plan dates back to 1995.  I have advised them that they cannot exclude years of service prior to the adoption agreement effective date (today) - they can only exclude years of service prior to the initial effective date of the plan (1995).  Therefore, by 'turning on' the Profit Sharing piece, all employees years of service will be counted for vesting purposes based on date of hire. The only way they can exclude years of service prior to the adoption agreement effective date (today) is to create a new plan.

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