Q about vesting computation period for short plan year 10/1/98 - 12/31

[Guest Kelly R]

I'm reading contracdictory definitions for the vesting computation period when plan year end is amended thus creating a short plan year (my case is 10/1/98-12/31/98). Does VCP for short PY run from 1/1/98-12/31/98 (overlapping with 10/1/97-9/30/98 plan year) or does VCP for short PY run from 10/1/98-9/30/99 (overlapping with 1/1/99-12/31/99 plan year? Situation is that I have an employee who terminated in 5/98--credited with a YOS @ 9/30/98; I say vesting as of 9/30/98 is it!--do not increment for short plan year (terminated prior to beginning of short plan year).

[mwyatt]

My understanding of the short year rules is that a vesting year starts from the beginning of the short year and also at the beginning of the next plan year following the short year. In your case of a short year 10/1/98-12/31/98, vesting would be measured on 10/1/98-9/30/99 and then on 1/1/99-12/31/99. So, your 12/31/98 valuation would basically reflect the vesting service @ 9/30/98 (unless someone really needs to get a life); the double bonus of service would reflect in your 12/31/99 valuation. Your person terminated prior to the beginning of the short year so their vesting service is unaffected by the change in plan year.

[Dan]

We have calculated vesting for short plan years as follows: If the short plan year is the first plan year, say 10/1/98 to 12/31/98, then one computes vesting for the period 10/1/98 to 9/30/99. However if the short plan year was not the first plan year, again using the period 10/1/98 to 12/31/98 as the short plan year, the vesting computation period would be 1/1/98 to 12/31/98.

This is a question that is commonly asked. Unfortunately I have yet to hear a definative answer. I can not say how this approach would withstand DOL scrutiny.

Did this participant actually work 1000 hours between 1/1/98 and May 1998? If not, then there is no question, no additional vesting is appropriate. However if so, the conservative approach would seem to be vest him the additional year.

However that may not meet the needs of this plan sponsor. Good luck

[mwyatt]

Look at DOL Regulation 2530.203-2© for the rules. My original analysis is correct (doesn't matter if it is first year or not). So for prior example, have two measurement periods to consider:

1) 10/1/98-9/30/99 (start of short year) and

2) 1/1/99-12/31/99 (and calendar year thereafter).

The key point to note is that a change in plan year will usually accelerate vesting service by "double counting" service. Client should be aware of this implication when changing the plan year.

Anyone who terminated prior to the beginning of the short year is clearly unaffected by the amendment.

Here is the DOL regulation in question:

© Amendments to change the vesting computation period.

(1) A plan may be amended to change the vesting computation period to a different 12-consecutive-month period provided that as a result of such change no employee's vested percentage of the accrued benefit derived from employer contributions is less on any date after such change than such vested percentage would be in the absence of such change. A plan amendment changing the vesting computation period shall be deemed to comply with the requirements of this subparagraph if the first vesting computation period established under such amendment begins before the last day of the preceding vesting computation period and an employee who is credited with 1,000 hours of service in both the vesting computation period under the plan before the amendment and the first vesting computation period under the plan as amended is credited with 2 years of service for those vesting computation periods. For example, a plan which has been using a calendar year vesting computation period is amended to provide for a July 1-June 30 vesting computation period starting in 1977. Employees who complete more than 1,000 hours of service in both of the 12-month periods extending from January 1, 1977 to December 31, 1977 and from July 1, 1977 to June 30, 1978 are advanced two years on the plan's vesting schedule. The plan is deemed to meet the requirements of this subparagraph.

[Chester]

I agree with mwyatt's accurate depiction of the situation. It doesn't matter what the client wants, you should abide by the regulations. Changing plan years often does provide the participants with an additional year of service, and the client should have been made aware of this eventuality in the discussions leading up to the decision to change plan years.

[John A]

As mwyatt pointed out, the appropriate regulation is DOL Regulation 2530.203-2©. However, I disagree with mwyatt's analysis.

Here is the DOL regulation in question:

© Amendments to change the vesting computation period.

(1) A plan may be amended to change the vesting computation period to a different 12-consecutive-month period provided that as a result of such change no employee's vested percentage of the accrued benefit derived from employer contributions is less on any date after such change than such vested percentage would be in the absence of such change. A plan amendment changing the vesting computation period shall be deemed to comply with the requirements of this subparagraph if the first vesting computation period established under such amendment begins before the last day of the preceding vesting computation period and an employee who is credited with 1,000 hours of service in both the vesting computation period under the plan before the amendment and the first vesting computation period under the plan as amended is credited with 2 years of service for those vesting computation periods. For example, a plan which has been using a calendar year vesting computation period is amended to provide for a July 1-June 30 vesting computation period starting in 1977. Employees who complete more than 1,000 hours of service in both of the 12-month periods extending from January 1, 1977 to December 31, 1977 and from July 1, 1977 to June 30, 1978 are advanced two years on the plan's vesting schedule. The plan is deemed to meet the requirements of this subparagraph.

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The question concerned a short plan year of 10/1/98 - 12/31/98 with the prior plan year being 10/1/97 - 9/30/98. In Journal of Pension Benefits Volume 4 Issue 3 from Spring 1997, J. Michael Pruett writes "The determination of vesting with respect to a short plan year is based on the 12-month period ending on the last day of the short plan year." I agree with J. Michael Pruett. My reasoning is that the "preceding vesting computation period" prior to the amendment changing the plan year has to be the 12 month period (10/1/97 - 9/30/98 in the example being questioned) ending prior to the short plan year. The "first vesting computation period established under such amendment" then "begins before the last day of the preceding vesting computation period." So the "first vesting computation period established under such amendment" should be 1/1/98 - 12/31/98. I could possibly see an argument that either method is acceptable (that is, either A) vesting computation periods of 10/1/97-9/30/98,1/1/98-12/31/98, and 1/1/99-12/31/99, or b) vesting computation periods of 10/1/97-9/30/98,10/1/98-9/30/99, and 1/1/99-12/31/99). Since the regulation above does not even mention changing the plan year, only changing the "vesting computation period to a different 12-consecutive month period", it would seem to be possible under the above regulation to keep using 10/1-9/30 for as many years after the change in plan year as you would like and to change to any different 12-consecutive month period provided credit is given for overlapping periods. Is anyone aware of additional guidance that would tie the above regulation to a change in plan year?

[My 2 cents]

On Saturday, May 27, 2017 at 0:12 PM, Bumppo23 said:

One wonders if some employers schedule employees anticipating the possible extra vesting under these circumstances.

Wouldn't the employer trying to keep people from earning vesting credit be illegal?