PPA

[Guest Wolves1962]

Is anyone Amending their plans right now? If one has a Defined Contribution Plan and the plan is not electing to have Automatic enrollment is there any urgency to amend? What is the time line you are all on for the PPA?

thanks

[Guest Wolves1962]

No answers?

Just wondering if anyone has amended their plans?

[John Feldt ERPA CPC QPA]

Most of our DC plans were already using a top heavy vesting schedule, but for those few who were not and who were also safe harbor, we had them decide before we sent the safe harbor notice for 2007 and we sent a vesting schedule amendment with their 2007 notice. We did this because, as you know, the Safe Harbor notice for 2007 must state the plan's vesting provisions.

The main concern was for those clients who had a 5 year cliff in 2006 - would they want to adopt a 3-year cliff or the 6-year graded. Those that were already using the 7-year graded will just move up to the 6-yr graded.

Other than that, our biggest efforts are for design changes to add DB plans or to amend the existing DB plans to increase the DB and leave the DC at 6% - we're usually doing the DC as a safe harbor cross-tested with the owners getting 9% and the employees getting 3% (as long as the testing passes and as long as that keeps them under 6% overall) and that way they get the deferrals deducted and no ADP test is needed.

[J. Bringhurst]

It is my understanding that you have to move to the 3-year cliff if you currently operate under a 5-year cliff schedule (for any employee who has at least an hour of service on or after 1/1/07).

My question is whether or not the new schedule applies to contributions made on or after 1/1/07 but that relate to the 2006 plan year.

Any guidance out there on this?

[John Feldt ERPA CPC QPA]

Well, under the text of the law itself, I don't see that a 5-year cliff plan is required to go to the 3-year cliff. It looks to me like they must do either the 6-yr graded or the 3-yr cliff, see the phrase "clause (ii) or (iii)" as shown in the text below:

[PPA] SEC. 904. FASTER VESTING OF EMPLOYER NONELECTIVE CONTRIBUTIONS.

[PPA §904] (a) Amendments to the Internal Revenue Code of 1986-

(1) IN GENERAL- Paragraph (2) of section 411(a) of the Internal Revenue Code of 1986 (relating to employer contributions) is amended to read as follows:

(2) EMPLOYER CONTRIBUTIONS-

(B) DEFINED CONTRIBUTION PLANS-

(i) IN GENERAL- In the case of a defined contribution plan, a plan satisfies the requirements of this paragraph if it satisfies the requirements of clause (ii) or (iii).

(ii) 3-year VESTING- A plan satisfies the requirements of this clause if an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.

(iii) 2 TO 6 YEAR VESTING- A plan satisfies the requirements of this clause if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from employer contributions determined under the following table:

.................... -- The nonforfeitable

Years of service -- percentage is:

....... 2 ............. -- ..... 20

....... 3 ............. -- ..... 40

....... 4 ............. -- ..... 60

....... 5 ............. -- ..... 80

... 6 or more .... -- .... 100.

Of course, if they move to the 6-year graded schedule then they must deal with those participants who have 3 or more years of vesting now - those participants can elect to stay on the 5-year cliff or to move to the 6-yr graded, unless the employer provides that they are vested under whichever schedule provides the better vesting at each year, then no election would be necessary.

[J. Bringhurst]

I've been struggling with this issue because of the CCH explanation of this provision found at CCH 720 (otherwise I'd read 411(a)(2)(B) more literally):

"A defined contribution plan...must vest all employer contributions according to the schedule that currently applies only to employer matching contributions. Thus, if a defined contribution plan uses cliff vesting, accrued benefits derived from all employer contributions must vest with the participant after three years of service..."

[J. Bringhurst]

Okay, J4FKBC...I've actually come around to your way of thinking on this one...no matter how CCH reads, the language of the Act is what is important...I guess that what CCH is trying to say is that if you want a cliff schedule it has to be 3-year and if you want a graded schedule it has to be 6-year....

[Guest mjb]

There are a lot of uncertanties regarding the effect of this change such as will an employer be required to use the same vesting schedule for both matching and discretionary contributions or can different schedules be used. Most advisors are waiting for IRS guidance before amending plans. The IRS is behind in issuing guidance e.g., they have deferred the effective date for providing the diversificaton notice for plans funded with employer stock.

[John Feldt ERPA CPC QPA]

Of course, if your using a prototype and it somehow requires you to use the same schedule for both, then that may also dictate the direction you take. It is certainly easier for the participants if they only need to know one vesting schedule.

[John Feldt ERPA CPC QPA]

Also, I think you will be allowed to word the amendment such that it also only applies to the contributions attributed to plan years starting after the 2006 plan year (and resulting account balances thereof). So far, none of our clients wanted to do that, though. One is still considering.