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Amending Vesting Schedule


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Plan has immediate vesting.  Client wants to amend the Plan to a 3 year cliff vesting.  I used 1/1/19 for the change date (first day of next plan year) because I felt like the treatment during the transition stage was just to complicated and not really the crux of the question anyway.

Option A:  3 year cliff vesting will apply to all new Employer Match money accrued after 1/1/2019. All of the old money will still be 100% vested for everyone who had it, because their accrued benefit is protected.

Option B: 3 Year cliff vesting applies to any new participants who become eligible on or after 1/1/19.  All of the employees who are participants in the :Plan on 1/1/19 shall forever be 100% vested in any match that ever is deposited to their accounts because the vested percentage is protected.

My understanding from the ERISA Outline Book is that the "ERISA Conference Report" which describes Congress's intent might support Option A. But the IRS through some guideline on their website took the position that Option B applies.

According to the EOB, "conventional wisdom" is to use Option B.

Has anyone ever used Option A?

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I just found this in my Basic Plan Document (Corbel Volume Submitter, PT Formatted):

(g) No reduction in Vested percentage due to change in vesting schedule. If this is an amended or restated Plan, then notwithstanding the vesting schedule specified in the Adoption Agreement, the Vested percentage of a Participant's Account shall not be less than the Vested percentage attained as of the later of the Effective Date or adoption date of this amendment and restatement. The computation of a Participant's nonforfeitable percentage of such Participant's interest in the Plan shall not be reduced as the result of any direct or indirect amendment to this Article, or due to changes in the Plan's status as a Top-Heavy Plan. Furthermore, if the Plan's vesting schedule is amended (including a change in the calculation of Years of Service or Periods or Service), then the amended schedule will only apply to those Participants who complete an Hour of Service after the effective date of the amendment.

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My client cares nothing for cleaner.  They adamantly want as much money on vesting as possible.  There is a new regime in town and they are very upset that the old regime gave away the store so to speak.  I think there are cash flow issues, and some decent turnover.

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austin you strike me as one who historically thinks through things well so forgive me if this is pointing out the obvious but I just took over a plan that did a vesting sch change and this issue came up imminently. 

I would recommend the amendment makes it clear how rehires are handled.  Maybe becasue of that base document language it is clear as the vested percentage can't go down.  But my new client is going from a 3 year cliff to a 6 year graded and the amendment is silent on how to handle someone who was hired years ago but now rehired.  We found a guy with 2 YOS who gets to keep that service.  Is he 1 year from 100% vested or 4 years from being 100% vested?  It would be nice if the amendment was clear on the topic. 

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ESOP, that scenario is much more complicated than what we have to deal with fortunately.

I suppose I COULD amend our Plan for this client to remove that paragraph and do it anyway, and yes of course lose reliance.  But how comfortable is everyone that the IRS won't come back and question this. ESPECIALLY since I can't even submit for a DL anymore?

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The IRS rules as described above were implemented to extinquish all remnants of what is known as "class year vesting".  Option A leads directly to disqualification.

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It's still in the EOB as an acceptable interpretation (albeit one that does not line up with the IRS's position).  Something about the fact that the "Conference report" which is the best interpretation of Congress's intent supports Option A.  It's the 2017 version of the EOB.

At any rate, Sal left the door open a smidge indicating only that "conventional wisdom" suggests Option B.

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My understanding is the position of the IRS is once a participant is vested, that participant is vested in all future contributions of the same type.  You can't bifurcate the benefits for vesting purposes.  In other words, Option B is the safer approach.  I have never used Option A.  

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Hi Austin - I'm sure you know this already, but a client such as you describe almost certainly will throw you under the bus if anything goes sour with option A. Are you even presenting this to them as an option? I'd certainly be inclined not to, although I don't know the details of the situation. I suppose you could do the old, "I don't recommend this, but if after getting an opinion from ERISA legal counsel you wish to proceed in this manner, here's a hold harmless to sign if you instruct me to proceed in this fashion" routine. Now, I'm not an attorney, and I don't know how successful a hold harmless is if defending yourself in a lawsuit - any attorneys out there who would like to weigh in on this? But it usually scares the clients enough so they don't proceed with the risky option - they just hate to sign a hold harmless. Good luck on this one - clients like this make me wish I'd listened to my Uncle Jerry, who counseled me to become an optometrist.

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I would never do the amendment described above on my own.  There is an ERISA attorney we work with regularly on all of the abnormal stuff like this (there's not that much like this, of course).  a) because we think he is great; b) we are not lawyers and so are not comfortable coloring outside the lines; c) we can have peace of mind knowing that if the tax cometh, we can provide him with another's information.  I know he wouldn't do it if it wasn't possible.

Now that I think about, presumably amending the basic plan document to pull out that paragraph in and of itself would be a cutback though wouldn't it. 

 

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Not so sure about that. If you take the approach that option A is allowable, then how is it automatically a cutback? Also, under the "3 year continuation" - probably the next paragraph - doesn't that also appear to indicate by its very nature that such an amendment isn't automatically a cutback?

Haven't really thought this through - just a couple of quick thoughts... 

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example 4 of 1.411(d)-3(a)(4) speaks of merging plans with different schedules, but the logic should still apply

naturally the plan permits anyone with 3 years service to choose which schedule they want.

one plan was 5 year cliff, the new schedule will be 3/20 (heck the example is before the 2/20 requirement and 3 year cliff requirements)

Participant G has 2 years of service so he can't even choose a vesting schedule..

However, Plan is in violation because G has no right to the 5 year cliff(or anyone who could choose can't choose properly. if they pick 3/20 he loses out on the 5th year at 100%. if they chooses 5 year cliff they lose out on the 20% after 3 years and 40% after 4 years. the plan would be ok if it gave Participant G (and similarly situated ees) 3/20, 4/40 and 5 /100

but the example also clearly states "with respect to accounts balances attributable to benefits accrued as of the applicable amendment date" 

it does not say "and all future benefits accrued as well"

so it is vesting attached to the benefits accrued as of the date, not the vesting itself.

or at least that is my understanding.

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What am I missing? You can't apply the new 3-year cliff to any matching contributions made before 1/1/2019 for anyone. You can apply it to any matching contributions made on or after 1/1/2019 for anyone except a participant with 3 or more years of service. If the participant has 3 or more years of service, the keep the full and immediate vesting. See IRC sec. 411(a)(11). Of course, the group you can't apply it to for new contributions (3 or > YOS) would be fully vested under the new schedule anyway, so doesn't make a difference.

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the issue is because the IRS said vesting is 'protected' so some think it is 'permanent'. so they think  someone who has 2 years of service if 100% vested is always 100%. but the IRS, even in it's example only says the vesting to those benefits accrued to data. so even if the person was 0% vested with 2 years of service their accrued benefit to date is under the old schedule (and the new if portions are better)

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They can't apply vesting to new money to already vested participants. 1.411(a)-8(a):

The nonforfeitable percentage (determined as of such date) of such employee's right to his  employer-derived  accrued benefit is not less than his percentage computed under the  plan without regard to such amendment.

The percentage is protected, not the amount.

if they want to restart vesting they need to set up a new plan, exclude service prior to the effective date and they must not terminate the current plan, or it will become a predecessor plan and then the service exclusion in the new plan would not be permissible  

 

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Not for nothing, Corbel put it into their Basic Plan Document which makes me think the IRS made it a requirement for an opinion letter.  Perhaps there is an LRM or whatever they are that says it is a condition of a favorable letter?

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I think my post earlier is correct, and I think Tom Poje is articulating why. Note that the language quoted from 1.411(a)(8) specifically says that you can't reduce the vested percentage in the employee's "accrued benefit." Treas. reg. 1.411(a)-7(a)(2) defines the "accrued benefit" in a DC plan as the "balance of the employee's account balance held under the plan." In other words,  the "balance of the employee's account balance held under the plan [as of the date of the amendment]," and not the account and whatever, ever goes into it.

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  • 2 years later...

Sorry to revive this long dead thread, but I just wanted to see some of your additional thoughts on the following.

1. It appears that the EOB is referring to Publication 6389. I believe the relevant language is in Section VII. Line b which in relevant part reads as follows:

". . . Although each participant’s nonforfeitable percentage, as of the amendment’s adoption or effective date, may not be less under the new schedule than it would have been under the old schedule (see a., above), the new schedule may provide for lower nonforfeitable percentages in future years. For example, if a plan replaced a 3 year cliff vesting schedule with a 2 to 6 year vesting schedule, a participant with two years of service on the date of the change could have 20 percent vesting after the change rather than the 0 percent vesting before the change. However, when the participant earned a third year of service, the participant’s vesting would only be 40 percent under the new schedule whereas it would have been 100 percent under the old schedule. If this reduction in future vesting can occur, the plan must provide that each participant who has completed 3 years of service with the employer and whose nonforfeitable percentage is determined under the new vesting schedule may elect to have the nonforfeitable percentage determined under the old vesting schedule."

Tripodi may read this to mean such a participant must continue to be vested in his/her account balance, including the portion of the account balance attributable to contributions allocated after the effective date, [under the old more favorable schedule] until his/her vesting percentage increases under the amended schedule. But is the IRS guidance really saying that? Or am I just looking in the wrong place? 

2. Consider the following note in the current IRS website page titled "Issue Snapshot - Change in Retirement Plan Vesting Schedules."

At the very end, after an example, the IRS notes: "All post-amendment contributions (accruals) will vest under the new vesting schedule, as Participant G was 0% vested and only had one year of vesting service. See IRC Section 411(a)(10)." Granted, this leaves open the issue of what if, under the example, the Participant was 20% vested. Or does it? If we are looking at the right place in Publication 6389, then it does not matter because the participant had less than 3 years of service.

Any thoughts are appreciated.

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