Unique requirements for vesting

[Guest caddieadmin]

I suppose this is a two part question.

In setting up my company's 401k, I do not want to use the elapsed time method because of the transient nature of our employees and I would LIKE of course to use the hourly method in recording service, but there is no "hourly wage" per se, only compensation for work completed. So it is difficult to determine hours worked on a yearly scale. Is it possible to define an hourly wage in the plan document so that at the end of each plan year you are able to simply divide total compensation for the year by the hourly wage, giving you hours worked for the year?

Secondly, I would like to use a "cliff" vesting schedule. I would like to allow for 100% vesting after two years instead of three, but I have a question about that. Hypothetically, let's say for the first two years there are NO matching contributions. After two years, the plan sponsor decides to initiate matching contributions. Under a 2-year "cliff", would those plan participants who have already worked for 2 years become instantly 100% vested? Or would they have to work for another 2 years to acquire that designation.

Thanks so much for your time, guys.

[Tom Poje]

hours can be based on an 'equivalencie' method

for example the monthly equivalencie would be 190 hours per month for each month someone works at least 1 hour.

another type of equivalencie is based on earnings, which basically takes someones earnings for a year, divides by a factor set forth by the DOL and that is the number of hours. if the ee worked 750 hours under this method, that transates to 1000 in the eyes of the DOL.

as for vesting, once someone receives credit for 2 years of service they are 100% vested in all money contributed at any date.

I know that is a brief description of stuff, but hopefully enough to get things started

[Guest caddieadmin]

Thanks so much for the fast reply Tom.

Just so I'm clear, as far as the second part to my question goes, I know an ee is 100% vested in their own contributions at all times, but I what if for the first two years of the plan the employer does not contribute any matching contributions. And then after two years the employer finally starts to making matching contributions...would the ee be 100% vested in the matching contributions right away (assuming a 2-year cliff), or would they have to wait an additional 2 years before they were entitled to all of the employer's contributions?

And please forgive me if you already answered this. I wasn't sure if you were just talking about ee contributions.

Thanks again.

[Tom Poje]

no more waiting, once an ee has 2 years he is 100% vested even if no match was made earlier.

you do have the choice of ignoring service prior to the effective date of the plan

[Guest caddieadmin]

One last question Tom (or to anyone else reading).

You mentioned another equivalencie method for calculating hours of service for the year, one that was based on earnings.

Divide earnings for the year "by a factor set forth by the DOL."

Is there any chance you would have a link or a DOL regulation reference I could look up to find out what that factor is?

[Guest caddieadmin]

And I suppose before anyone answers maybe I can slip in another quick question (sorry, I have so many):

Is it possible to aggregate service hours?

What if the following occurred in the 3-year cliff situation:

1st year the employee worked 1750 hours

2nd year the employee worked 1250 hours

This individual has racked-up 3000 hours of service in 2 years instead of 3. Is that individual now 100% vested, or will that person have to wait another year?

Thanks so much guys.

[J Simmons]

Caddieadmin,

Vesting years are usually earned per 12-month measurement period, and whether the employee had the requisite (1,000 or less, as specified in the plan document) during a 12-month measurement period.

The answer depends on your reference to "1st year" and "2nd year". Is that measured by anniversaries of the date he or she began working? If so, then depending on the date of hire, parts of the employees 3,000 accumulated hours fall into two or three 12-month measurement periods. If the necessary number of hours as specified by the plan to earn a vesting year happened in each of the three 12-month, that person would have three vesting years.

If your reference to "1st year" and "2nd year" is to the 12-month measurement periods for vesting purposes, then he or she would probably have only two vesting years.

The reason I say probably is you could have a more generous method drafted in your plan documents. It could be one that gave the employee the greater number of years from either the method described above, or simply on accumulation of every 1,000 hours worked he or she is credited with another vesting year.

[Guest caddieadmin]

Thanks so much.

You guys have no idea how much I love this forum. Trying to get questions answered via IRS call centers has been a nightmare.

[Guest caddieadmin]

Under EGTRRA, if you're using a cliff vesting schedule, it says that matching contributions must be 100% vested within 3 years.

Say you're crediting service based on earnings (and at the end of each year dividing by the lowest hourly wage). The full time employees will most certainly vest within 3 years, perhaps even 2 if they work hard enough (I would like to use an aggregate method of keeping track of service hours).

But what about the part-time employees that may only earn 375-500 hours a year? If you're using an aggregate method for counting hours, if an employee is only piling up 500 hours a year, it would take 6 years to become 100% vested (assuming 1000 hours are required).

Would this still comply with EGTRRA standards? Or would another vesting schedule/way of crediting service be required?

[TLGeer]

The three year rule is a minimum standard, the slowest a plan can provide cliff vesting. You can create any rule you want that is faster. The pert-timers at 500 hours would never get vested under the minimum standard, so you can use any enhanced rule you want.

Going back to an earlier point you raised, the vesting rules now require full vesting in the entire account balance/accrued benefit. Once upon a time, there was authority to use "class year" or rolling vesting, but that is long gone.

If you intend to hire a TPA, exotic rules can be a problem. Software systems are set up on the hours of service per computation period method, and the manual intervention for other formats is going to drop many TPAs off the list and probably require extra cost for TPAs willing to take the plan.

One possibility, which I have used, for dealing with part-timers, is to exclude them by class. Since the testing of coverage can be broken down between statutory eligibles and statutory ineligibles, a part-time definition that only excludes employees under half-time can test out fine. The second option is to require a 1000-hour year for eligibility for one or all benefit structures (e.g., deferrals, match, employer nonelective) under the plan.

And remember, if you provide full and immediate vesting as to a benefit structure other than deferrals, you can make them wait for two YOS.

Tom Geer

[Guest caddieadmin]

I've been reviewing the IRS Alert Guidelines on minimum vesting requirements and I got a little confused:

"...a contributory plan that uses a vesting computation period may exclude a year of service in which an employee made no mandatory contributions, if the absence of the contribution was the only reason the employee was ineligible to participate in the plan."

If the Plan has no eligibility or service requirements for Participation, would I be allowed to exclude a year of service for vesting purposes? Or would that only be allowable if a break in service occured?

I know I'm potentially talking about two time periods here (the plan year and the vesting computation period), but any thoughts on this topic would be very helpful.