Vesting issue

[Guest Nini]

Employer wants to change vesting schedule effective 01-01-07.

Employer contributions made prior to 01-01-07 will continue to vest on the prior 5 yr cliff vesting schedule and beginning 01-01-07, any contributions made will vest on the 6 yr graded schedule; of course, salary deferrals are 100% vested.

Is this a problem? Any IRC/reg guidance would be appreciated.

Thanks!

[QDROphile]

You must comply with transition rules for vesting. See section 411 and regulations. For example, anyone with 3 years of service by December 31 will have to be 100% vested in post 2006 contributions after 5 years of service, unless we get some regulatory dispensation. Indeed, any IRS guidance would be appreciated.

[Tom Poje]

on old money, it doesn't matter how many years the person had. the old money is a protected benefit.

the IRS example is provided below.

when the vesting rules switched for match a few years ago, I thought the rule was you could track the vesting on old money under old rules and new money under new rules.

Example 4 (A) Employer O sponsors Plan D, a qualified profit sharing plan under which each employee has a nonforfeitable right to a percentage of his or her employer-derived accrued benefit based on the following table:

------------------------------------------------------------------------

Completed years of service Nonforfeitable percentage

------------------------------------------------------------------------

Fewer than 3.............................. 0

3......................................... 20

4......................................... 40

5......................................... 60

6......................................... 80

7......................................... 100

------------------------------------------------------------------------

(B) In January 2006, Employer O acquires Company X, which maintains Plan E, a qualified profit sharing plan under which each

employee who has completed 5 years of service has a nonforfeitable

right to 100% of the employer-derived accrued benefit. In 2007, Plan

E is merged into Plan D. On the effective date for the merger, Plan

D is amended to provide that the vesting schedule for participants

of Plan E is the 7-year graded vesting schedule of Plan D. In

accordance with section 411(a)(10)(A), the plan amendment provides

that any participant of Plan E who had completed 5 years of service

prior to the amendment is fully vested. In addition, as required

under section 411(a)(10)(B), the amendment provides that any

participant in Plan E who has at least 3 years of service prior to

the amendment is permitted to make an irrevocable election to have

the vesting of his or her nonforfeitable right to the employer-

derived accrued benefit determined under either the 5-year cliff

vesting schedule or the 7-year graded vesting schedule. Participant

G, who has an account balance of $10,000 on the applicable amendment

date, is a participant in Plan E with 2 years of service as of the

applicable amendment date. As of the date of the merger, Participant

G's nonforfeitable right to G's employer-derived accrued benefit is

0% under both the 7-year graded vesting schedule of Plan D and the

5-year cliff vesting schedule of Plan E.

(ii) Conclusion. Under paragraph (a)(3) of this section, the

plan amendment does not satisfy the requirements of this paragraph

(a) and violates section 411(d)(6), because the amendment places

greater restrictions or conditions on the rights to section

411(d)(6) protected benefits with respect to G and any participant

who has fewer than 5 years of service and who elected (or was made

subject to) the new vesting schedule. A method of avoiding a section

411(d)(6) violation with respect to account balances attributable to

benefits accrued as of the applicable amendment date and earnings

thereon would be for Plan D to provide for the vested percentage of G and

each other participant in Plan E to be no less than the greater of

the vesting percentages under the two vesting schedules (for

example, for G and each other participant in Plan E to be 20% vested

upon completion of 3 years of service, 40% vested upon completion of

4 years of service, and fully vested upon completion of 5 years of

service) for those account balances and earnings.

[Treas Reg §1.411(d)-3(a)(4) example 4]