Predecessor Service

[John Feldt ERPA CPC QPA]

An Employer has an existing 401(k) plan that currently covers everyone who meets the age and service requirements. They decide to add a defined benefit plan.

When the DB plan is started, they decide to cover only half of the HCEs and half of the NHCEs in the DB plan. At the same time, the 401(k) plan is changed to cover only the employees who are not covered by the DB plan (the other halves).

Can the DB plan exclude service prior to the plan's effective date for vesting purposes?

[Belgarath]

Ah, the old "carve out" approach. Ignoring the potential pitfalls and concentrating on your question:

Yes, for vesting purposes the service with the employer prior to the establishment of the DB plan may be ignored. Watch out, however, if the DC plan is terminated within 5 years - it then becomes a predecessor plan, and then you have to count the service. 1.411(a)-5(b)(3)(v)(B).

[Madison71]

Sorry to bring up a 5 year old post, but does this predecessor plan rule apply to the establishment of a new profit sharing plan as well? Lets say client has a 401(k) plan with discretionary profit sharing component. They want to make an employer contribution to several NHCEs only because they are concerned they are going to leave, but want to handcuff them in a way by setting up a vesting schedule. The NHCEs have been with the company well over 6 years. The current 401(k)/PS plan will not be terminated in the next 5 years....its been around forever. No issues with establishing a new profit sharing plan for just these NHCEs...exclude all other employees and make an employer contribution to it - knowing they have to stay within deductibility limits and combine for 415, etc. Thank you!

[Madison71]

...sorry I posted under DB/Cash Balance and not 401(k)