plan amendment and vesting

[PensionNewbee]

a client became a safe harbor plan effective 1/1/99. Didn't separate pre-safe harbor PS contributions, and declared all participants 100% vested. Now, the client is complaining that people who left prior to 1999 should not be 100% vested.

If a terminated participant left an account balace in the plan, and the plan was amended to safe harbor status, and the amendment does not specifically mention the vesting schedule, are those participants 100% vested or not?

[Blinky the 3-eyed Fish]

How did he declare everyone was 100% vested? Did he stick his staff in the water and shout it at the top of his lungs or is there some sort of documentation to the effect?

[Guest pjb]

A plan must at least be amended to apply a more liberal vesting schedule to those who have at least an hour of service following the amendment effective date. On the other hand, the plan may be amended to apply the new schedule to all participants.

If you amended the nonelective contribution section of the document to provide for the safe harbor provisions, I would look for something in the document that provides for the new immediate vesting schedule. If there doesn't appear to be any language stating the new amended schedule only applies to those with at least 1 hours of service, then I would say the improved vesting schedule applies to all participants, active or not. If the plan was amended properly to apply only to actives, then you would need to correct the plan.

[chris]

Just to clarify.... the plan was amended to add safe harbor 401(k) provisions and at the same time the plan was also amended to provide for immediate 100% vesting? See 4.23 of the ERISA Outline Book re the application of the new schedule to all participants. At first read it seems to say that if the new schedule is better at all points than the old schedule, then the new schedule automatically applies to all participants.

[Guest pjb]

I believe that section pertains to whether participants should be given an election to remain under the old schedule. See 4.29.

[g8r]

Ultimately it depends on the language in the amendment. Many plans state that when there is a change to a new vesting schedule, it only applies to those participants who have an hour of service after the effective date of the amendment. For example, look at the EGTRRA good-faith language issued by the IRS which does this with respect to the change in the vesting schedule for matching contributions.

As mentioned, if you are you changing to a less favorable schedule, those with 3 YOS have the right to elect to stay under the old schedule - but that's not really the issue here.

[PensionNewbee]

I only wish he'd stuck a staff in the water and declared it from the mountaintops. I do love good drama. Actually, the partners decided at a meeting that all participants should be 100% vested (so say the meeting minutes) however, no other formal action was taken. No amendment to the plan, no communication to employees.

The "old" vesting schedule is 2/20. There is nothing in the document, as apparently, an amendment was to be done to reflect the partners wishes. However, as I stated, nothing was done.

So, are the participants fully vested?

[Blinky the 3-eyed Fish]

Your pre-1999 participant's accounts consist of no safe harbor nonelective contributions. You can identify the source of the contributions, so their vesting is determined under the provisions in the plan. In other words, they are not 100% vested.

Now, for the other participants that received contribution post-1999 you have safe harbor nonelective dollars intermixed with regular profit sharing dollars. Obviously, there are different requirements concerning each source. You MAY need to go back and separate the sources, even if on paper. Making the regular PS dollars 100% vested is not enough. There are also distribution restrictions on the safe harbor nonelective contributions. These same restrictions must apply to the regular PS dollars if you can't separate the sources. However, if current in-service distributions are allowable for regular PS dollars, you cannot now impose restrictions and violate 411(d)(6). That is why I say you MAY need to separate the sources.

So, in summary to the last paragraph, consult your document and weigh the issues on how you will track the sources.