Vesting service for previously excluded employees

[JDuns]

Employer (A) has a plan that they have maintained for many years for their employees. In 2002, they acquired (stock acquisition) another company (B) that did not sponsor any retirement plans. Company B employees will not commence participation in A's retirement plan until 2004 (when the transition rule expires).

Can anyone craft an argument that vesting service for B's employees is not required to be counted before 2004?

I can get to starting vesting service at the date of acquisition but can't get to a later date. Thank you for your help.

[ccassetty]

I'm curious how you got to the date of acquisition on a stock sale?

[JDuns]

Because the prior employer did not sponsor a plan, I believe the pre-acquisition service may be disregarded under IRS Reg. 1.411(a)-5(b)(3) (especially i and ii). In the example for a merged plan that had been sponsored by two employers, the employees of each of the constituent employers were credited with vesting service from the date their prior plans had been adopted. And years of service with the employer for periods when no plan or predecessor plan has been maintained may be excluded.

Combining these two concepts, I can argue (I think correctly) that the service must be counted from the acquisition.

If the acquired company had a plan, I believe that the service must be counted from the date that plan had been adopted.

[ccassetty]

I'm not an expert on this, but I don't see how you can use the exclusion of service prior to the adoption of a plan in a case were there was no plan. I think you are stuck counting all service with B unless plan A did exclude service prior to its effective date. If the current plan of employer A excluded service prior to its effective date, then I think you can exclude service for the acquired company B prior to that effective date also. If the current plan doesn't already have that provision, you can’t add it now.

If prior to the acquisition of company B by Company A, company B had adopted a new plan and excluded service prior to the effective date, then when the two plans were merged, you would have been able to exclude the service with company B prior to the adoption of company B's plan. It doesn't sound like this happened.

I hope one of the experts out there will respond to this.

[mbozek]

If Employer B adopts a resolution to participate in the qualified plan sponsored by Corporation A why doesnt that become the date that employer A maintains the plan under reg. 1.411(a)-5(b)(3)(ii) which provides that if an employer adopts a plan that has previously been adopted by another employer, the adopting employer is not deemed to maintain the plan prior to the year in which the plan is adopted. Alternatively if A and B are part of a controlled group, the date of vesting service would be the date B became a member of the controlled group with A. see -5(b)(3)(iv)(B).

[JDuns]

To summarize the responses assuming that companies A and B were unrelated prior to the transaction in 2002 that made them a controlled group, A sponsored a plan prior to the transaction and B did not.

For A's employees - vesting service will commence on the date A's plan was established (in the 1980s), unless the employee was hired after that date.

For B's employees - vesting service will commence on the date of the transaction (when they become a member of the controlled group). If B had adopted a plan before they became part of the controlled group, vesting service would be counted for B's employees from the date the plan had been established.

A's plan could grant more service (so long as it meets the non-discrimination requirements for granting pre-participation service) but could not ignore vesting service between the date of the transaction (in 2002) and the date B's employees are brought into the plan (in 2004) because all service within the controlled group must be counted (pursuant to -5(b)(3)(iv)(B).

[ccassetty]

I'm still not comfortable with this. First of all, once employer B was purchased by Employer A, they are not separate employers, they are one employer, so using reg. 1.411(a)-5(b)(3)(ii) to exclude service prior to the purchase date doesn't hold water.

However, I have to admit that the 5(b)(3)(iv)(B) cite is more compelling. Still, something about this just doesn't smell right. I'm going to keep looking for my own knowledge.