Does this vesting schedule and definition of year of service satisfy ERISA requirements?

[Guest MapleUno]

Company matching contributions to a 401(k). This is from the FAQs on the company website.

You gain ownership in the Company's matching contributions at the rate of 20% for each plan year of service you complete. That means you will be 100% vested after five years of service. You will be credited with one plan year of service for each complete calendar year that you work for the Company, beginning with the calendar year following your date of hire. All years of service are credited on the last day of each plan year (December 15). If you are actively employed on that date, you will receive vesting credit.

Qustion:

If your DOH is 11/26/2001 and DOT is 12/6/04 then according to the above you are only 40% vested (credit for 2 years of service 2002 and 2003). You get no credit for 2004 - even though you worked more than 1000 hours that year. Does this definition of YOS violate ERISA?

thanks

[rcline46]

This method is known as 'elapsed time' vesting, perfectly legal, 1,000 hour rule is not applicable, point to point is. Anyone who is considered employed for the calendar year gets vesting credit regarless of number of hours.

[Guest MapleUno]

thanks.

[austin3515]

I don't know... Elapsed time means the amount of time elapsed from hire date to termination date. Under elapsed time, I think they should have three years (i.e., just over 3 years of service between DOH and DOT). I don't think you can require a complete calendar year.

What's more if you look at the DOL regs on creditting service I'm, just about certain you will find that you cannot have a last day requirement for purposes of creditting a year of service. In eligibility, you can require employment on the entry date to enter the Plan, but that's it. The year of service can still be creditted on the last day of the Plan Year, but it can't be conditional upon employment.

I'd check out the DOL regs...

[jaemmons]

I agree with Austin. The elapsed time method credits years of service for every 12 month period that has elapsed from the employee's date of hire through date of termination. The provision questioned in this thread seems to discount the initial employment period, which does not comply with Regulations 1.410(a)-7(b)(1).

[Guest MapleUno]

The way the plan is written, even though it vests 20% per YOS you may have to work almost 7 years to be fully vested (assume DOH 12/30). However, your vested percent will always satisfy the minimum ERISA graded vesting requirements. So does it matter if the definition of YOS violates ERISA?

Thanks

[austin3515]

"So does it matter if the definition of YOS violates ERISA?"

Your kidding, right?

[Guest MapleUno]

Ok. Let me rephrase the question. What are the consequences of having a bad definition? Does the company have recalculate vesting percentages and somehow make employees that terminated whole for the under-vesting? Are there penalties? Thanks. As you can tell I don't know much about this subject.

[austin3515]

Yes, you would need to recalculate vesting, and yes if they forfeited too much, you would need to make them whole. With IRS correction procedures (rev ruling 2003-44) you need to make a "full correction" which means you need to go back to day 1 oft he Plan to make people whole. You could probably debate how many years to go back though, but it should be at least 3 (i.e., years still open for audit). If it's a smaller plan, without a lot of distributions, I'd go back as far as possible.