BRF - multiple vesting schedules

[jaemmons]

Controlled group has 3 plans, each of which contains the following vesting schedules:

Plan A - 3 year cliff

Plan B - 3 year graded - Year 1 - 33% - Year 2 - 66% - Year 3 - 100%

Plan C - 3 year graded - Year 2 - 25% - Year 2 - 50% - Year 3 - 100%

Since all employees fully vest after 3 years of service, does anyone see any problems with keeping these schedules? If one of the plans had a 6 year graded schedule (e.g. -2/20), would this make a difference, and if so, would you be testing how many participants would have the right to fully vest after 6 years?

My thinking has always been to look at the maximum time period someone can become fully vested, in determining whether there would be a potential for discrimination.

Thanks for any reply.

[Tom Poje]

I think you would still have to test.

suppose your boss set up two plans, one for himself (Plan B)

and one for everyone else - so you are in plan A.

After 1 year would you consider it to be a discrimination issue that he is 33% vested and you are 0% but you both performed the same service?

[jaemmons]

Thanks Tom,

I agree that there might be some issues with your scenario, but effectively the owner and other employees will all be fully vested at the same service level. This is actually the point where I question what are we to test when comparing vesting schedules for potential BRF problems? Do we look at each schedule on a year by year basis, which does not make sense to me, because vesting is based on future years of service.?.

I had always thought that the "manner in which benefits vest" is not considered a BRF which would need to be tested. Your example gives way to other 401(a) problems, but if the facts and circumstances can support the decision to maintain separate vesting schedules (e.g. - high turnover and associated admin costs with processing distributions and forfeitures), do we really have a BRF issue with vesting (especially if all ee's fully vest at the same service level)?

[Tom Poje]

well, lets take the example to an extreme, and consider the 'good old days'

plan 1 is 10 year cliff.

Plan 2 is 99% vested for years 1 - 9 and in year 10 you become 100% vested.

now, would you say that is non discriminatory because after 10 years everyone is 100% vested.

I realize that is an extreme example, but I dont see how it is different than what you have.

buried in ERISA Outline book (9.157, 2003 edition) is some discussion but not quite what you are asking - at least I think - in that it seems to me you would have to test each 'svc year'.

however, what is interesting (and I never would have thought about it)

is that a 5 year cliff and 7 year graded are deemed equal, as are the top heavy schedules. e.g. you could use one schedule for hourly and another for salaried.

[jaemmons]

Thanks Tom,

I thought there was a section in Sal's "library" but I did not dig enough. In relation to the three plans I outlined, they all appear to have schedules which provide for benefits to vest at least as quickly as the top heavy schedules (fully vest after 3 years of service), so it appears that they would all satisfy the "deemed equivalency" rule under Reg. 1.401(a)(4)-11©(2). If one of the plans had a non-top heavy schedule, I would perform a BRF test.

I know you don't have all relevant facts and circumstances, but do you agree that if a plan contains schedules which provide a vesting of benefits at least as quickly as the minimum vesting schedules under IRC 411(a)(2) & 416(b)(1), there would not appear to be any discrimination.

Again thanks for your replies and assistance.

[Tom Poje]

I really don't know for sure. The example in the Outline Book of one that fails is a 5 year cliff and a 6 year graded.

In that case you have a schedule (top -heavy) that is better than a non top heavy. That obviously fails.

I could argue that in your example you have a schedule that is better than a top heavy schedule (not equivalent to it) and therefore would fail. the regs do describe a facts and circumstances - I guess if there are only NHCEs in the 3 year cliff and a majority of HCEs in the other plan I would have 'misgivings'.

Again, I am certainly no expert in this area.

[Belgarath]

While it does apear that the regs permit one plan to have, for example, 5 year cliff and another group to have 7 year graded (assuming NTH), I must admit that I'd be squeamish about having 2 (or more) separate 3 year vesting schedules, with one being more favorable to HC than the other which covers NHC.

I feel the same way as Tom - the ©(2) that you refer to does offer an "exception" but I wouldn't dare to attempt to use it for something that falls outside of that specific exception. And the situation you outline, to me, appears to fall outside of it. At the very least, I'd request a determination letter on this one if I were going to attempt to use it. But I probably wouldn't attempt to use it.

I don't think ©(2) is saying that it (your situation) is ok just because the 3 year is better than TH minimum vesting. It is just saying that for a NTH plan, the 5 and 7 year schedules are equivalent, and for TH, the 3 and 6 are equivalent. But within that framework, a combination of several plans can't discriminate against the NHC under the general principles of ©(1) as Tom mentioned.

But I'm not supremely confident that I'm correct...

[jaemmons]

I see your point. Thanks