Is this a benefit, right or feature that must be tested for discrimina

[jkharvey]

A newly established plan wants to provide that anyone employed before the effective date of the plan is automatically 100% vested in account balances. All other participants must follow 2/20 vesting schedule. The part I'm having trouble with is that of 5 employees who were employed before the effective date of this plan, 4 are owners. Is this a situation that must meet the 401(a)(4) testing requirements?

[actuarysmith]

Wow, I'm surprised nobody has chimed in on this one yet.............

First of all, can you even say that someone is vested in something prior to the effective date of the plan. What exactly could they be vested in until there actually is a plan?

I am pretty sure that the prototypes would only allow you to say something like everyone employed on the effective date is subject to a certain vesting schedule, and thereafter subject to another schedule (with the appropriate application of the Grandfather clause - of course). You may have to just slap an amendment on the plan right after it is started up - I can't remember if the prototypes allow you to specifiy different vesting schedules.

The part of all of this that I have the most trouble is reconcilling it with 1.401(a)(4)-4© Effective availability of Benefits, Rights , and Features. This particular vesting "scheme" seems like a clear violation of the intent of this section.

Any other thoughts out there?

[Fredman]

How long has the business been around? Most documents I've seen credit years of service prior to the effective date of the plan. If you can prove the business has been around for 6 years, then anyone earning a year of service in those 6 years will already be 100% vested.

I think an auditor would have a problem if you have one schedule in place for one day (the effective date) and then switch to a 2/20, especially with 4 out of 5 participants being owners.

Can't the owners just "hold their horsies" and wait to earn their vesting like everyone else?

[actuarysmith]

I concur with Fredman. Why can't they "hold their horsies?" and vest like everyone else. In the event one or more of them terminated prior to being fully vested, they could handle the issue in one of several different ways.

1. They could terminate the plan and make everyone 100% vested at that time.

2. They could handle the forfeited amount "outside" the plan. For example, the departing owner could receive a cash bonus (possibly grossed up for taxes) equal to the amount forfeited.

3. They could handle the forfeited amount in the terms of the buyout agreement. For example, the sale price on the owners shares could be "adjusted" to reflect the amount forfeited.

Just some food for thought..................