How are years of service prior to age 18 disregarded?

[John A]

A plan provides that, for vesting purposes, plan years prior to age 18 will be excluded. The plan year is the calendar year. An employee has a birthdate of November 1, 1979 (so 18th birthday is November 1, 1997) and a hire date of January 1, 1996. The employee has worked 1000 hours in each calendar year which satisfies the plan’s hours requirement for vesting. Which of the years 1996, 1997 and 1998 are counted for vesting? Would the answer change if the 18th birthday was February 1, 1997? Would the answer change if the 18th birthday was July 1, 1997 and the employee worked 1000 hours both before and after July 1 in 1977?

Clearly 1996 is not counted. Clearly 1998 is counted. Is 1997 counted?

There is disagreement on our staff on this.

IRS Reg. 1.411(a)-5(b)(1) says:

1.411(a)-5 Service included in determination of nonforfeitable percentage.

(a) In general.

Under section 411(a)(4), for purposes of determining the nonforfeitable percentage of an employee's right to his employer-derived accrued benefit under section 411(a)(2) and § 1.411(a)-3, all of an employee's years of service with an employer or employers maintaining the plan shall be taken into account except that years of service described in paragraph (b) of this section may be disregarded.

(b) Certain service.

For purposes of paragraph (a) of this section, the following years of service may be disregarded:

(1) Service before age 22.

(i) In the case of a plan which satisfies the requirements of section 411(a)(2) (A) or (b) (relating to 10-year vesting and 5-15-year vesting, respectively), a year of service completed by an employee before he attains age 22.

(ii) In the case of a plan which does not satisfy the requirements of section 411(a)(2) (A) or (b), a year of service completed by an employee before he attains age 22 if the employee is not a participant (for purposes of section 410) in the plan at any time during such year.

(iii) For purposes of this subparagraph in the case of a plan utilizing computation periods, service during a computation period described in section 411(a)(5)(A) within which the employee attains age 22 may not be disregarded. In the case of a plan utilizing the elapsed time method described in § 1.410(a)-7, service on or after the date on which the employee attains age 22 may not be disregarded.

While the reg has clearly not been updated from age 22 to age 18, can it still be relied on to say that, in the example above, 1997 must be counted if the 18th birthday occurs any time during 1997? Or is it possible to disregard 1997 in some circumstances (more up-to-date guidance?)?

[Dave Baker]

Are you sure the plan talks about disregarding "plan years" before age 18, or instead does it disregard service before age 18?

I would think the document would say the latter, and that hours of service performed before November 1, 1997 are ignored for vesting purposes. Hence at the end of the 1997 plan year the individual probably had only about 340 hours of service (November and December) and wouldn't earn a year of service for vesting purposes. At the end of 1998 (assuming 1,000 or more hours of service during 1998) he or she would have earned 1 year of service for vesting purposes.

[John A]

Dave,

Then you are saying that IRS Reg. 1.411(a)-5(B)(1)(iii), shown in my first post above, does not apply?

And yes, I should have written that the document is written to disregard all service prior to age 18.