More rapid vesting under EGTRRA

[Brenda Wren]

We continue to struggle with the options provided under EGTRRA to apply the 2/20 schedule to our existing 3/20 schedule plans. Definitely easier to apply 2/20 to all matching balances as of 1/1/02. But for the client that doesn't want to, what are his options? (1) Can he continue to apply the 3/20 schedule to anyone who terminated prior to 1/1/02? (2) Can he apply the new more rapid schedule to SOLELY 2002 matching contributions and beyond? Or would this create a 411 (a)(10) problem for those employees with 3 years of service?

[kocak]

My understanding:

1. Only need to apply 2/20 schedule to contributions made for PYB after 12/31/01. If employer wants to keep 3/20 schedule on old money, I recommend setting up a new source. The Pre-EGTRRA matching source is 3/20, the Post-EGTRRA matching source is 2/20.

2. If employer wants to use 2/20 schedule for all, he can still limit the 2/20 schedule to those with an hour of service in the PYB after 1/1/02. So you would have a 3/20 schedule for employees who termed in 2001.

Does this answer your question?

Michele

[Brenda Wren]

Thanks Michele. That was my understanding, too. But the good-faith amendments provided by IRS don't spell it out that clearly. And they mention the 3-year service rule under 411(a)(10). The attorney for for our document provider wasn't able to give us clear guidance either. Thanks for your input.

[2muchstress]

I agree with Michelle. However, I also strongly believe that if a client will not apply the 2/20 vesting to all sources, and all ee's, then they should be charged extra.

I had one client who did not want to have all ee's on the 2/20, and was thinking about only vesting the new match on the 2/20. They paused for a second, and then said, "How much extra will this cost me". I didn't have a response, I was so shocked.

I just said yes, it will cost more, but I don't know how much. They decided it was not worth the hassle.

[MWeddell]

Why should they be charged more?

All new matching contributions are credited to a different contribution source with the 2/20 vesting schedule. Surely your recordkeeping system can handle more than one contribution source! For participant statement, the two match sources are reported together. This is not a big deal to me in my opinion.

[Mike Preston]

It may not be a big deal mathematically, but a participant that gets a benefit statement showing that their vested interest is 43% will most assuredly ask questions. I would keep the sources separate on the benefit statement if I were to do this. But I would still expect it to take longer to explain.

[2muchstress]

It is not necessarily a system issue. It's a time issue. I review everybody's vesting before I send anything out the door. To blindly mail a report that is generated by the system without any human review would simply be irresponsible. The more sources I have to review for accuracy, the more time I spend.

When participants want distributions, vesting is the biggest question that comes up. To explain that same thing over and over to every participant takes time.

Also, if somebody termed in a prior year, and vesting changes don't apply to them, many systems will not automatically pick that up. I have worked with 4 different systems, Planfax, ASC, Datair and LDE. Every system requires a certain level of human review. There are always problems with status codes, vesting calcs. etc.

I'm not going to triple their charges, or even double their charges, but I am going to make sure that I get paid for the time I spend on a plan. That's the name of the game. Nobody enjoys pro-bono work.

[mbozek]

While I think the law is absolutely clear that the 2/20 vesting only applies to amounts contributed on or after 1/1/2002 there is a more basic question of how much will be gained by keeping the old 3/20 vesting in effect for pre 02 allocations. For example, assume 100% employer matching contribution of $10,000 in 01 and assumed interest rate of 6% for 4 years. The account balance will be worth $12,625 as of 12/31/05. At 83% vesting after 5 years the balance due the employee will be $10,478 and the forfeiture amount will be $2146. Since most er matches are a lot less than 100% (e.g. ,50% match would be worth $1073) there is a very valid question ofwhether the additional administraton time to maintan dual vesting schedules is really worth it especially if the client has to pay for it.

[Mike Preston]

It isn't. Except in the most unusual of cases.

[MWeddell]

I guess I'm outvoted on this one and since it's been a few years since I've been directed involved in recordkeeping, your opinions are probably better informed than mine.

I'm not suggesting that anyone do pro bono work, but to be so shocked to have a client request to accelerate their vesting only to the extent required by law as to not have any idea what the cost is struck me as unreasonable. It seems a perfectly reasonable request on the client's part.

100% checking of vesting at the time of distribution is normal, but is 100% checking of all participants' vesting for quarterly statement production required? You can bet the major recordkeepers aren't doing that: after some spotchecking you've got to have confidence that your software works right.

Thanks for the discussion.

[Brian Gallagher]

On the subject of charging:

Are you going to charge a one-time fee, or wil lit be ongoing. I believe for a good customer relationship a one-time fee would not be out of the question, but an on-going chare would be.

Would you charge a plan if they added a P/S option that had a different vesting than match? I'm geussing not, so why do that w/ two match schedules?