410(b) Failsafe

[Lori Foresz]

If a plan fails coverage and has to give a contribution to a terminated EE who is zero percent vested- is that okay? Seems like there would be some requirement that it be at least partially vested- but maybe not.

Please and thanks

[JanetM]

If you are giving contribution in order pass a failed test, that contribution must be 100% vested.

[Blinky the 3-eyed Fish]

I disagree with that blanket statement. If the plan needs to be amended under 1.401(a)(4)-11(g) to provide a contribution, that contribution must be vested. However, if the document has "fail-safe" language which automatically gives a contribution to someone who didn't otherwise satisfy the accrual requirements, then there is no prohibition of following the document and giving the contribution to whomever is to receive it. If that person happens to be terminated and 0% vested, so be it.

The -11(g) provision has discretion in who to give the contribution and that is why it is necessary to have the restriction. Following the document has no discretion and that is why the person can be 0% vested.

[jquazza]

Even with an -11(g) amendment, you don't have to provide 100% vesting. Surely, you couldn't give it to a participant who is 0% vested and terminated during the plan year being corrected, but if the participant is still accruing vesting at the end of the PY, that shouldn't be a problem.

Excerpt from the regs:

Corrective amendments must have substance. A corrective amendment is not taken into account in determining whether a plan satisfies section 401(a)(4) or 410(b) to the extent the amendment affects nonvested employees whose employment with the employer terminated on or before the close of the preceding year, and who therefore would not have received any economic benefit from the amendment if it had been made in the prior year. Similarly, in determining whether the requirements of paragraph (g)(3)(vi)©(1) of this section are satisfied, a corrective amendment making a benefit, right, or feature available to employees is not taken into account to the extent the benefit, right, or feature is not currently available to any of those employees immediately after the amendment. However, a plan will not fail to satisfy the requirements of paragraph (g)(3)(vi)©(1) of this section by operation of the provisions in this paragraph (g)(4) if the benefit, right, or feature is made available to all employees in the plan as of the date of the amendment.

[Blinky the 3-eyed Fish]

Correct. I was speaking in the context of the question, which was about a terminated participant.

[kgr12]

I noticed this topic from a few years back and noticed the comment from jquazza that "Surely, you couldn't give it to a participant who is 0% vested and terminated during the plan year being corrected, but if the participant is still accruing vesting at the end of the PY, that shouldn't be a problem."

Sungard Relius posted and article on its website earlier this year suggesting that in the case of a nonvested separated participant you can avoid the problem by simply vesting that participant in the corrective contribution: "Typically the drafter of the 11(g) amendment will avoid this issue by vesting the participant in the allocation." That article can be found here: http://www.relius.net/news/TechnicalUpdates.aspx?ID=962

jquazza's comment doesn't exactly contradict Sungard's statement, but certainly comes close.

Any thoughts?

[PensionPro]

When we do a 11-g amendment it has language something like this: 'the participant's vesting percentage for these contributions will be the higher of the vesting percentage under the plan's applicable vesting schedule or 20%".

[kgr12]

Great thought - thanks!