Terminating Plan

[Guest lforesz]

Hi,

I'm having a senior moment. A plan terminated. Do terminated participants with balances in the plan have to be 100% vested due to the termination if they quit before the plan termination date?

Any help in refreshing my memory is greatly appreciated.

[Guest Bob K]

Yes, anyone who has a balance AND has not had 5 one year breaks-in-service must have their balance fully vested upon termination

[Harwood]

I thought that "affected employees" had to be made 100% vested. "Affected employees" is not a defined term. Counsel should be consulted - some ERISA attorneys will advise that the plan does not have to go back 5 years with full vesting.

[WDIK]

I have seen a prototype document that allows the adopter to choose which unpaid terminated vested employees will also be fully vested as of the plan termination date.

The options are:

1) Discretionary (no plan reference)

2) Only those with less than a 5 year break

3) Only those with less than a 1 year break

4) Only if terminated in plan year of termination

5) All unpaid terminated vesteds

[Tom Poje]

According to the 'ERISA Outline Book' the IRS, in GCM 39310 and FSA 1992-1023-1 (Field Service Memorandum) an 'affected employee is an employee or a former employee.

Thus, the implication being, all become 100% vested

[maverick]

Tom:

How about a person who was already paid out and has a non-vested balance that has not been forfeited? Say the plan only forfeits at the end of the plan year, and the plan termed mid-year. You don't have to change the vesting and make another distribution, right?

Thanks.

[Tom Poje]

4.87 of the 2003 edition says

'the nonvested portion will become vested only if the plan termination occurs before the forfeiture is incurred pursuant to the cash-out distribution.'

so it depends on the document wording, I suppose - ee gets paid - does forfeiture occur immediately (I would assume normally to be the case) and is not reallocated until the end of the year, or does the forfeiture 'occur only at the end of the year'

In other words, in the case you said, ee was paid out vested balance, forfeiture occurs immediately.

all this vaguely rings a bell. if the company itself went out of business, the ee did not become fully vested because the whole idea was if he was rehired he could 'buy back' his '5 years', thus had a chance to increase his vesting.

If the company was gone, then he couldn't be rehired, so you didn't have to vest the ee 100%.

[alanm]

There are many cases concerning the affected employee thing and plan terminations. Borda v. Hardy, 1998, judge Carr. Flanagan v. Inland Empire, 9th cir. 1993. The one that I like the best is Bayer, 769 F. Supp. 225, Judge Cohn. The Bayer court held that it was rational for the plan administrator to conclude that the employees were not affected employees if:

employment ended before the plan termination date(resolution adoption by the board) and there was no evidence employee terminations were linked to the plan's termination.

[g8r]

One other point to bring up. There is no authority for a "forfeiture suspense account." Thus, until a forfeiture has been disposed of, it's still part of the individual's account. That's why I would conclude that the individual is fully vested if the forfeited amount hasn't been disposed of yet. Thus, if someone had been paid out but the plan doesn't forfeit the account until 5 breaks, I think the person is fully vested and is entitled to an additional distribution. I guess that's the tradeoff of delaying forfeitures for 5 breaks vs. an immediate forfeiture coupled with the buy-back rules.

And, another consideration. As pointed out there are various court cases out there. My guess is individuals weren't fully vested and brought a cause of action against the plan. So, if you like going to court to fight the issue, then these cases should give you some comfort. For a very large plan it's probably worthwhile on both sides to fight it. For a small plan, what's the net loss to the employer after taking into account your time to research the position and provide an opinion?