Startup DB plan; OK to exclude service prior to the effective date for

[Guest lisbetf]

I have a startup DB plan where the plan sponsor wants to exclude service prior to the effective date for purposes of vesting. Is this okay?

[jane123]

Absolutely

[Guest lisbetf]

But you can't exclude service prior to a participant's entry date, right?

[Mike Preston]

Correct. Note, however, that if there was another plan of the employer then you must also count service while that other plan was in place unless there are unusual circumstances.

[Guest lisbetf]

They have had a 401(k) plan in place for a while. Can they still exclude service prior to the effective date of the new DB plan for vesting in the new plan?

[Mike Preston]

No. Give specifics as to effective date of 401k plan and termination date of 401k plan, if any, and somebody can be more precise.

[Guest lisbetf]

Not sure of the effective date of the K plan, but it is still in effect, and has been for a while, with no plans to terminate.

[Mike Preston]

In general, you may not exclude service in the DB plan for periods before its existence if there was another plan of the employer. There is a small, very difficult to climb through window that allows service before the effective date of a plan to be ignored if it is not with respect to a "predecessor" plan. See 1.411(a)-5(B)(3)(v). It is not for the faint at heart (translation: the client needs to be guided by an ERISA attorney familiar with such matters). If the client starts down that path and then reverses course for any reason, the administrative consequences can be a nightmare. That is not to mention the fact that the IRS, DOL or a disgruntled participant may disagree entirely with the process and the plan sponsor has to spend quite a bit of time and go through the expense of justifyting their choice.

In the vast majority of cases, therefore, the existence of your 401k will practically eliminate the ability to ignore service prior to the efffective date of the DB plan.

[Tom Poje]

by the way, if you are not aware of it, you should be able to use FREEERISA.com to look up an old 5500 and find the effective date of the 401k plan

[Guest jody303]

My understanding is that you can exclude service for vesting purposes prior to the effective date of a new plan even though the plan sponsor already maintains another plan, as long as the existing plan does not meet the definition of a 'predecessor plan' under the reg. cited by Mike Preston. I think that reg. generally says that a predecessor plan is one that was terminated during the five year period immediately preceding or following the establishment of the new plan.

I hope this is correct and that I haven't missed anything, because we recently did this with a new DB plan established by a client already maintaining a PS plan. We told the client that it couldn't terminate the PS plan for at least five years.

Am I missing something else?

[Mike Preston]

That is what the regulation says. However, there are no exclusions listed so if the k plan were to terminate in the 5 year period after the DB is established, for any reason, it appears that the exclusion of service prior to the effective date of the DB plan is retroactively reversed. Clients usually have a hard time believing me when I tell them the administrative consequences of this (although the consequences are somewhat easier to manage if the new plan being established is a DB plan), so I still believe it is best to have an ERISA attorney let the client know what is in store if the k plan is terminated.

Note that this means that unless the IRS were to grant an exception, even if the k plan were to terminate because of statutory changes (such as the newly proposed Bush administration concepts), the retroactive inclusion of service prior to the effective date of the DB plan would be required.

[Guest jody303]

I agree with you, Mike. Thanks.