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3-year cliff vesting still allowed


TPApril

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I have just been asked to set up 3-year cliff vesting but interestingly don't seem to have other plans with such a schedule.

I feel like I recall a recent law that 3-year cliff was no longer allowed?  Was that for DB plans only?

I understand it doesn't work for top heavy plans but plan in question is not top heavy.

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3 year cliff is still allowed and does work for Top Heavy.

5 year cliff and 7 year graded are still available for traditional DB plans.

There was a change a number of years ago to Cash Balance Plans that required full vesting after 3 years whether the plan is top heavy or not. So 3 year cliff can be common is some cash balance plans. At least in my experience.

EDIT - fixed due to Zeller post - forgot about the DC change that 5 year cliff and 7 year graded no longer allowed.

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DC plans can use 6-year graded or 3-year cliff (or anything more generous).

Traditional DB plans can use 7-year graded or 5-year cliff (or anything more generous). If the plan is top heavy it would have to use 6-year graded or 3-year cliff.

Cash balance plans must use 3-year cliff (or more generous).

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Odd question because 3-year cliff is quite common and basic - you weren't asked to set up 3-year class-year vesting, where each year's contribution vests after three subsequent years? Because class year vesting is definitely no longer allowed in qualified plans.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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IRC 411(a)(2)(B)(ii) permits 3-year cliff vesting.

Long ago, if memory serves me correctly, if you did 3-year cliff you could have a 3-year wait for eligibility, and that was popular. Then Congress changed that to you could hold someone out for only 2 years, and you had to 100% vest at 2 years. See IRC 410(a). That made 3-year cliff less popular, since it was no longer a way to hold employees out for a long time.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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