Prior Service Credit and Maximum Number of Years Credited

[Guest amm19]

I have an employer that has purchased another entity. The purchase agreement outlines that years of service under the purchased entity shall be included under the defined contribution plan for all purposes. However, there is no limitation on the number of years in the agreement and I know that they have individuals who have been employed for 20 or 30 years in some cases.

I am pretty certain that law limits prior service credit to a maximum of five years. I can't find the statute or locate this in print other than reference in prototype documents at this point. In those references, IRS approval must be given if prior service exceeds five years. Could someone please help by pointing me in the right direction as far as where this lies in the code?

Thank you.

[david rigby]

What does the plan need prior service for?

(Oops, I ended a sentence with a preposition. A thousand pardons.)

If this is a DC plan, probably the only uses will be for determining eligibility service and vesting service.

[Guest amm19]

There is a tiered formula for a match that rewards length of service. Basically, an extra .10 per year of service, which does exceed five.

[AndyH]

You may be thinking of the 401(a)(4) regulation which deems a grant of past service not in excess of five to be non-discriminatory. It is 1.401 (a)(4)-5(a)(e).

I think this is only for a DB plan, at least that is what the examples imply, and and it doesn't necessarily mean that a grant of more than 5 is discriminatory. That just becomes something you need to justify.

But I'm not aware of anything limiting service in the situation you've described.

[MGB]

The law doesn't limit prior service credit. Defined benefit plans give more than 5 years quite often (new plans, new purchased groups entering plan, etc.).