Two different vesting schedules

[doombuggy]

This question was posed to me today:

Re: Changing the Vesting Schedule

You would not be able to keep the prior vesting schedule for the monies deposited before their desired vesting schedule change, while having monies deposited after this change subject to a differing vesting schedule.

Since you are proposing an accelerated vesting schedule, we needn't be concerned with protecting a participant's vesting percentage as required per IRC §411(a)(10)(A). However, the IRS interpretation of IRC §411(a)(10)(A) can be used to help explain why you can't have 2 vesting schedules apply to the same contribution(s).

The IRS interprets the code to indicate a participant's vesting percentage rather than account balance must be protected in the event of a vesting schedule change. It would stand to reason then that the IRS would view a change to the vesting schedule as applying to ALL contributions (rather than just the contributions after the effective date of the change) since the participant is now 100% vested.

What we are saying is if you changed to a 100% immediate vesting schedule, you would need to apply this to all monies--not just new funds.

I think the question being posed to my office is that this is employer money that is currently on a six year graded schedule, and as of 1/1/06, the company wants to change the schedule to 100% immediate, but only to moneys that go into the plan after 1/1/06. So all er money in the plan before 1/1/06 would stay at the old schedule.

We are contacting Datair to see if the plan doc allows for this crazyness, but if it does, I would imagine that the monies would need to be segregated.

My boss just told me that this is a 401(k) Profit Sharing plan, but we are not sure if the source in discussion is P/S or match. Thanks for your thoughts and opinions!

[four01kman]

New vesting schedule applies to money deposited or credited after the effective date of the change. Old vesting schedule continues to apply to money deposited or credited or earned prior to effective date of change.

Yes, you would have to maintain separate accounting for the two vesting schedules.

[Erik Read]

And, the Plan doc can be amended to allow for the "crazyness" - not sure about your statement:

"We are contacting Datair to see if the plan doc allows for this crazyness, but if it does, I would imagine that the monies would need to be segregated."

More a question I think if the system can do it - it can, you just have to create another source.

[austin3515]

I disagree. The vested percentage is what is protected, not the balance. Therefore, you can't amend the plan to decrease someone's vested status in the plan, even for contributions in the future. You CAN apply to new hires eligible after a certain date, but that's it.

Although Congress has implied that this is not what was intended, it really doesn't matter because what I've stated is the IRS' position, and it's the IRS that will find you, and not Congress.

If you have the ERISA Outline book, look up amending the vesting schedule. If you don't have that book, you should really get it!!

[wmyer]

Austin, as I read the question, they're not decreasing the vested percentage...they're increasing from 6-year graded to immediate vesting for new money. This can definitely be done, assuming no system, administrative or plan document issues.

[austin3515]

I'm quoting the ERISA Outline Book, page 4.21 2004 edition, Chapter 4, Section III, Part F.

"IRS Interpretation applues protected vesting percentage to future accruals. The IRS interprets this rule to mean the vesting percentage at the time of the amendment must not be reduced, EVEN WITH RESPECT TO BENEFITS ACCRUED AFTER THE AMENDMENT (emphasis added by Sal via underlining).

There's also an example in their demonstrating this.

He goes on to say that an ERISA Conference report contradicts this, but that that won't prevent the IRS from going after you under audit.

[Steve72]

"IRS Interpretation applues protected vesting percentage to future accruals. The IRS interprets this rule to mean the vesting percentage at the time of the amendment must not be reduced, EVEN WITH RESPECT TO BENEFITS ACCRUED AFTER THE AMENDMENT (emphasis added by Sal via underlining).

Maybe I'm missing something, but it seems to me that the vesting schedule for monies accrued after the amendment is actually increased.

I don't think this passage would prevent the separate vesting schedules.

[Guest Pensions in Paradise]

doombuggy - if the person posing the question still does not agree that you can have two vesting schedules for the same contribution source, you may want to point them to EGTRRA. EGTRRA required plans to provide for an acceleratd vesting schedule for post-2001 contributions, while providing a slower vesting schedule for pre-2002 contributions.

[401 Chaos]

Austin,

We are facing a similar issue regarding the possible amendment of our plan's vesting schedule and I am curious if Mr. Tripodi's discussion cites specific IRS authority or rulings for their interpretation that a participant's vesting percentage must be protected even for new employer matches made after amendment. Also, can you point me to a cite to the ERISA Conference Report or other comments you mention by Congress that contradict the IRS's interpretation. Reading 411(a)(10) alone, I can see where one could question the IRS's apparently expansive interpretation of this requirement. Thanks.