Vesting Service

[Guest sammy]

An employer currently maintains a defined contribution plan, which it intends to continue. Now the employer wants to add a defined benefit plan, but it would like to exclude service before the defined benefit plan's effective date for purposes of vesting. Is this permissible?

We think that the literal language of Section 411(a)(4)© and Treas. Reg. §1.411(a)-5(B)(3)(v)(B) (which I have paraphrased below) does permit this. However, we also suspect that the IRS may take the opposite position. Has anyone had the IRS review this type of situation?

Section 411(a)(4)© provides that a plan can exclude service before the plan's effective date for purposes of vesting for any period in which the employer did not maintain a predecessor plan.

Treas. Reg. §1.411(a)-5(B)(3)(v)(B) provides that an employer is considered to have maintained a predecessor plan if the employer terminated a prior plan within 5 years of establishing the new plan.

[jaemmons]

If an employer terminated another DB retirement plan within the past 5 years, then years of service prior to adoption of the new DB plan could not be disregarded for vesting purposes.

Treas Regulation 1.411(a)-5(B)(3)(v)(B) states that a predecessor plan was established within "the 5 years period immediately preceding or following the date ANOTHER SUCH PLAN (emphasis mine) terminates,..."

The key words are "another such plan" which would mean a like plan replaces a terminated plan within the 5 year period.

Had the employer sponsored another DB within the last 5 years which has been terminated?

[Guest sammy]

No, the employer has never maintained a defined benefit plan

[jaemmons]

That being the case, I would say that you could disregard years of service prior to the effective date of the new db plan.

[Blinky the 3-eyed Fish]

I had always understood a predecessor plan to be a plan (any qualified plan that is) that terminated within 5 years before or after the newer plan was establised. I have never seen a similar interpretation of the "another such plan" language Jaemmons desribes and am curious what others think.

Playing devil's advocate that the IRS would not consider the difference in plan types, there could be issues if you exclude years of service prior to the DB effective date IF the DC plan were to terminate within 5 years of the DB effective date. At that point the DC plan would become a predecessor plan. There might have been distributions that were done excluding some vesting service that should not have been excluded and some of the current participants might receive an increase in vesting years of service.

But if you are sure the DC plan will not terminate within 5 years, then there is no issue that you can exclude YOS for vesting prior to the effective date.

[Guest merlin]

In the ERISA Outline Book Sal Tripodi agrees with Blinky's interpretation. There is no loophole that the predecessor and succesor plans have to be of the same type. The only thng that matters is the 5-year time frame.