Full vesting upon plan termination

[k man]

I know that the code requires plans to provide for full vesting of "affected parties" upon plan termination. The plan provides for full vesting of participants upon plan termination. If a terminee is paid out prior to the the plan termination, does the terminee receive accelerated vesting also? I do not think so but would be interested in another opinion.

[Guest sdolce]

See IRS General Counsel Memorandum 39310. What this usually translates into is that vested terminees with a 5-year break-in-service do not have to be made 100% vested. But I have also seen IRS agents apply the GCM more stringently (and I believe incorrectly) and ask for full vesting for all vested teminees w/o regard to the 5-year rule.

[stephen]

Not necessarily.

I have had clients who elected to allow the paid otu terminated participants become 100% vested and had other clients who said they have been paid their correct amount.

I have generally asked the attorney for the plan to advise the client on that decision.

[k man]

The code requires vesting for "affected employees" and the plan provides for vesting for "affected participants. Since a paid out terminee is neither a participant or an employee, I believe there should be no vesting.

[actuarysmith]

We always advise our clients that they should consider vesting all terminated participants paid out within a period of up to 12 months prior to a plan term. This may be overly conservative, but who wants the service to come back later and rule that you should have done it that way to begin with...........

Basically we explain that it is probably a facts and circumstances determnation. We explain the potential risks to the client if they choose not to vest these prior terms. We then instruct the client to tell us in writing how they would like us to handle the situation.

Also, keep in mind that if you have a decent percentage of prior terminations (i.e. 30% or more) you may trigger a partial plan termination, which could also require accelerated vesting. (This scenario happens frequently when a business experiences a downturn, but tries to "hang on" for awhile before closing the doors.)

The bottom line is that YOU DO NOT WANT TO MAKE THIS DECISION YOURSELF! If you do, you become a fiduciary. Explain the pros and cons fully to your client and put the onus on them to direct you as to how to handle the situation.

[k man]

Absent supporting legal authority, I believe the 12 months is overly conservative but thanks for the opinion.

[david rigby]

I have also seen the following situation:

Plan has "deemed distribution" rule so that non-vested participants are deemed to receive a distribution of $0 immediately upon severance of employment. The purpose of this is to make sure that all terminated participants are paid as soon as possible , which is one of the requirements to avoid the "5-year" rule.

Then, if the plan terminates, those participants who terminated with less than 100% vesting in the plan year of plan termination are given 100% vesting (because they have not yet incurred a break in service), but any others who terminated in prior plan year (even if less than 12 months earlier) are not given additional vesting.

Also, good point from actuarysmith about partial termination.

[k man]

IRS GCM 39310 holds the following:

1. In the case of a qualified plan which provides that participants who separate from service will be paid their vested accrued benefits, a participant who separates from service and is paid his vested accrued benefit need not become further vested if the plan terminates before he incurs a break-in-service.

2. A partially vested participant who terminates service and who will not suffer a forfeiture of his nonvested accrued benefits under the terms of a qualified plan until he incurs a one-year break-in-service must be vested in his accrued benefit, to the extent funded, if the plan terminates prior to his incurring a break-in-service.

[Guest sdolce]

Further to actuarysmith's comments,The vesting question and the related partial plan termination issue are very strong reasons for submitting the plan termination to the IRS for a determination letter.These are items that an agent will certainly ask about and will therfore be covered in the favorable determination letter.

[Alf]

All the IRS requires in reviewing determination letter applications is that participants who have not received distributions by the proposed date of termination should be fully vested. This is even too generous in certain circumstances because it goes way beyond the affected participant standard where the sponsor is going out of business, but we have never had any incentive to fight the IRS on it.

[Kal]

GCM 39310 was issued before the 1year break in service rule was changed to a 5 year Break in Service rule under the Retirement Equity Act of 1984-Ira Cohen & Jim Holland both said they'd be reissuing it to refer to the 5 year break in service rules of REA