Vesting at Normal Retirement Age

[IRC401]

I have seen three different lists of IRC requirements for governmental plans. All three state that benefits must vest when an employee reaches normal retirement age (NRA), but none gives any cite for that requirement. Pre-ERISA 401(a)(7)requires vesting upon termination of the plan or discontinuance of contributions but not when an employee reaches NRA. Is there a requirement for vesting upon reaching NRA, and, if yes, where is it? Thank you.

[Carol V. Calhoun]

This one has driven me crazy for years! There clearly was a pre-ERISA requirement that contributions to a pension plan vest upon normal retirement age, and that contributions to a profit-sharing or stock bonus plan vest when "the stated age or other specified event has transpired." Part 5©(2) of Rev. Rul. 69-421, 1969-2 C.B. 59, citing Rev. Ruls. 66-11 and 68-302. The question is what the statutory source for this rule is, since none of those revenue rulings cites a statute.

Code section 411(e)(2) specifies only two pre-ERISA vesting rules which apply to governmental plans, pre-ERISA section 401(a)(4) and pre-ERISA section 401(a)(7). As you say, pre-ERISA 401(a)(7) deals only with termination of the plan or discontinuance of contributions. Thus, I have always believed that the requirement of complete vesting upon normal retirement age was based on pre-ERISA Code section 401(a)(4).

My belief in this regard is reinforced by Part 4(i) of Rev. Rul. 69-421, which states that a plan which provided a benefit only to employees "who have at least 15 years of service and stay on until the normal retirement age of 65" would be "within the purview of the statute," and therefore unacceptable only if it were discriminatory in operation. The clear implication is that a plan would NOT necessarily have to vest employees at the normal retirement age of 65, if they did not have 15 years of service at that point, unless failing to vest them produced discrimination in operation under Code section 401(a)(4). Since Code section 401(a)(4) does not apply to state and local government plans, the vesting upon normal retirement age rule should presumably not be applicable to such plans.

Another question: How meaningful is this requirement, anyway? Couldn't a governmental plan avoid the issue by defining "normal retirement age" as the age attained upon the later of age 65 or x years of service?