Exclusion of vesting service prior to plan effective date

[ac]

We have a client that sponsors a DB plan. The DB plan excluded service prior to the effective date of the plan.

It is my understanding that service prior to the effective date of the plan may be excluded as long as the sponsor does not have a predecessor plan. A qualified plan becomes a predecessor plan if it is "Terminated" within a 5 year period of the effective date of the new plan.

The client also sponsored a PS plan and a MP plan. The MP plan was merged into the PS plan. The PS plan has not been terminated.

Upon the merger of the MP plan into the PS plan, does the MP plan become a predecessor plan for vesting purposes?

[Effen]

The fact that they currently have a PS plan eliminates the ability to use the DB plan's effective date for vesting. You need to count service from DOH (or effective date of PS plan) for vesting service.

[Blinky the 3-eyed Fish]

Effen, you are incorrect. Ac correctly describes the rule that to be a predecessor plan here the plan has to be TERMINATED within 5 years before or after the DB's effective date.

Ac, a merger is not a termination. I would hold that you currently do not have a predecessor plan.

[Effen]

Are you suggesting that the currently active PS plan is not considered a "predecessor plan" and that a person could be 100% vested in the old ongoing PS plan, but 0% vested in the new DB plan?

[Blinky the 3-eyed Fish]

Absolutely!

[Belgarath]

I completely agree with Blinky. For the definition of a predecessor plan, see 1.411(a)-5(b)(3)(v)(B).

[Lame Duck]

Belgarath, you beat me to it.

[Effen]

Websters: predecessor - n : one who precedes you in time

1.411(a)-5(b)(3)(v)(B) Definition of predecessor plan. --For purposes of this section, if --

(1) An employer establishes a retirement plan (within the meaning of section 7476(d)) qualified under subchapter D of chapter 1 of the Code within the 5-year period immediately preceding or following the date another such plan terminates, and

(2) The other plan is terminated during a plan year to which this section applies, the terminated plan is a predecessor plan with respect to such other plan.

I'll be honest, I've been doing this for 20+ years and I have never heard this interpretation. I agree the Regs define predecessor as a terminated plan, but quite frankly that makes no sense. (I know, many Regs aren't logical.)

That said, since two others agree with you, I need to re-examine this position.

Since the Regs say 5-year period immediately preceding or FOLLOWING couldn't the existing PS plan become a prececessor plan if it terminates in the next five years?

So under your theory, why not periodically adopt new plans every year or so and continually restart the vesting schedules? That should work as long as I don't terminate them.

[Belgarath]

Effen - re your penultimate paragraph - yes, this can happen. In fact, I saw it once. The plan sponsor was rather unpleasantly surprised when a terminated participant in the DB plan had to become 100% vested because the PS plan terminated 2 years after the DB was established, and hence received a payout of about 25,000 more than the employer planned.

As to the final paragraph - if taken purely in the context of vesting, I suppose this might work. But I find it difficult to imagine that there isn't a way for the IRS to assail such a scheme on other grounds. And what employer would want to institute and freeze several plans, paying admin and doing forms, etc., for several plans at the same time? Why not just cease contributions to the PS plan until 5 years have passed and then terminate?