Help with Vesting

[DP]

I have a calendar year PS 401k with a Basic Safe Harbor Match. The plan was effective 1/1/02. They have a 6 year graded vesting schedule. Up through 2003, the Safe Harbor Match was the only employer contribution deposited. They plan to have an Discretionary Employer Contribution for 2004 which will make the plan top heavy for the 2005 plan year.

The owner is trying to do what she can to keep the vesting % down on HCE 2. HCE 2 was employed 7/1/03. Vesting is measured over the plan year, so at the end of 2004 HCE 2 will have 2 years of vesting service (20% vested).

The owner's financial planner is telling her she should go on a 5-year cliff vesting schedule. That would not work for 2005 when the plan becomes top heavy. If they implement a 3-year cliff effective 2005, HCE 2 will have 3 years of vesting service at the end of 2005 (100% vested) compared to 40% if they stay on the same vesting schedule. The owner thinks that since she has never made an Employer Discretionary contribution that she can retroactively change the vesting schedule. Am I correct that the vesting schedule cannot be amended back to the beginning of 2004?

Also the financial planner is telling the owner that she should start measuring service for vesting based on the 12-month period ending on each employee's anniversary date instead of using the plan year. This is an option in the plan document. I think this would be a nightmare to keep up with. And how in the world would you change midstream? Would you have an overlapping vesting period?

I'm about ready to jerk a knot in this financial planner's tail!

[Guest Pensions in Paradise]

If the owner's goal is to prevent HCE #2 from accruing a vested benefit, then why not just amend the plan to exclude HCE #2 altogether?

[Ron Snyder]

A vesting schedule can be amended retroactive to the beginning of the year in which the amendment is adopted (a retroactive "remedial" amendment may be adopted up until the return is filed for the year). However, the anti-cutback rules preclude reducing someone's vested interest retroactively in either event, but that does not appear to be the case here.

You refer to changing to a 12-month period ending on each employee's anniversary date as though it would be a hardship. In fact, it should be a simple coding matter in your computer software. You're not really doing this all by hand are you?

To change "midstream", you would run the val with the old vesting method, freeze the vested percent as an override, and then run the val with the new vesting method.

It seems to me that you may be the one with a knot in your tail.

[Guest Pensions in Paradise]

vebaguru - before you make comments about someone, you should understand what you are talking about. The difficulty with calculating vesting based on anniversary date is that you then have to obtain hours based on each employee's anniversary period, rather than on plan year period.

[Ron Snyder]

The DoL regulations address alternative methods of determining hours of service. Why give a client a prototype plan document that offers options one cannot administer? It seems to beg for the kind of problem encountered here.

[DP]

Thanks, Pensions in Paradise, for understanding the nightmare I was speaking of. Getting the employer to provide each employee's hours based on his/her anniversary date would be like pulling eyeteeth.

The owner likes the option of excluding HCE 2 from the plan. Thanks for the suggestion.

[Blinky the 3-eyed Fish]

Veba, it's the vested percentage the IRS deems to be protected, not the vested balance. That leaves the HCE at at least 20% vested no matter what, so it IS a cutback issue. Also, to provide DOL equivalent hours would most certainly provide additional hours to many many employees. The owner wants to limit vesting to the HCE, but I bet she doesn't want to give away vesting years to others.

Good solution PP.