Vesting on Plan Termination - revisited

[flosfur]

I read prior discussions on this topic on this Board and have couple of question.

Prior discussions and Pension Answer Book appear to say that, in general, any partially vested participant paid out prior to the plan termination date need not become 100% vested.

Is there a minimum period between the payout date and plan termination date for this to apply?

Suppose, in a calendar year plan, some partially vested terminated participants were paid out in March, June, August and October 2005, say.

1. If the plan is terminated in November 2005, say, is anyone of the participants paid out in 2005 required to be vested 100%?

2. What if the plan is terminated January 2006, the plan year following the plan year during which the distributions were made?

3. What if some of the payees had 1+ year of break in-service and some did not as of the plan termination date?

[david rigby]

No expert I, but it may turn on the plan provisions. BTW, in your (3), I don't think any 2005 terminated employee can have a BIS in November 2005, since a BIS probably does not occur until the plan year is complete.

[flosfur]

No expert I, but it may turn on the plan provisions.  ....

Plan provsions cannot override the law or regs or can they? The question is: what is the situation under the law/regs?

..........  BTW, in your (3), I don't think any 2005 terminated employee can have a BIS in November 2005, since a BIS probably does not occur until the plan year is complete.

Some of them could have terminated in 2003 or even 2004 with less than 500 hours (BIS).

[JAY21]

Some IRS district offices upon receiving a plan term submission (Form 5310) with partially vested (and paid out) terminated participants within the last 5 years may attempt to try and require you to go back and fully vest everyone terminated and paid out within the last 5 years. However, there's at least one IRS nat'l memorandum that supported the 1 year BIS approach for full vesting, and we usually dig that out for support, and it seems to take care of the issue by allowing us to only fully vest those not with a 1-year BIS criteria.

I believe the issue is that there's not a clear defined rule on who is an "impacted" participant (beneficiary) upon a plan termination. Only impacted participant need full vesting. Therefore, there have been some differences between the Nat'l office and even between the District offices in defining who is an impacted participant (beneficiary).

[RTK]

The basic IRS position is that "affected employee" required to be vested upon plan termination includes any terminated nonvested participant who has not yet incurred a parity break or forfeited a nonvested accrued benefit under the cash out/buy back rules.

This position started out in private guidance and I think was later set forth in some sort of public guidance. This was when the deemed cash out of zero percent vested participants provisions were added to plan documents, allowing immediate forfeiture of the accrued benefit upon a zero percent vested participant's termination of employment. Unfortunately, I don't have the time right now to pull the old files where I stashed the guidance. If you get stuck, let me know and I will try to track it down.

Thus, if your plan has the proper forfeiture and cash out and buy back provisions, your plan should not be required to vest the partially vested participants cashed out in 2005.

[Kirk Maldonado]

The courts have been a lot less consistent than the IRS regarding the way in which they have analyzed whether there was a partial termination.