Vesting Amendment

[TBob]

I have a 401(k) plan who's sponsor has decided to outsource one of their departments. A number of their employees are being involuntarily terminated as a result. We have looked at the partial plan termination issue and have determined that it will not be a partial plan term.

The sponsor would like to 100% vest these participants anyway. The plan currently has a 6 year schedule. I want to be sure that there are no problems with amending the plan for just this group of participants. We will need to determine is this would be benefiting a non-descriminatory group but is there anything else I am missing? They are on a PPD prototype document if that helps.

Any and all input appreciated.

[QDROphile]

Will the amendment break the prototype?

[TBob]

The prototype has a nice little line on it that says: "Special vesting provisions: ___________. "

As one great document expert once told me....Blank lines on a prototype are our friends!

It goes on to say that the special vesting provision must satisfy 411(a), must be definitely determinable, must not descriminate in favor of HCEs and must not violate 401(a)4.

I assume that we could fit this type of provision on this line in the prototype. I have never used this line in the prototype for this purpose before so I want to be sure that I am not crossing the line with this type of amendment. I want to be sure that I can apply this amendment to just a select group of individuals without causing a problem.

[masteff]

must be definitely determinable

Biggest problem I see is how to define the group to not discriminate or have unintended consequences. For example, if you only referenced the special vesting to people leaving between certain dates, then people from other departments leaving in that same window would get the special vesting too. If you define it by that specific department, you have to be sure everyone in that department goes (is anyone staying to monitor the outsourcer?) and that no one outside that department is getting missed (like a reduction in IT support due to lower headcount). One thought, have the amendment reference an appendix which simply lists all the people (either by name or by employee number, if you have unique employee numbers), just have to be very thorough when making the list (or amend additions to the list once it's final).

A more complicated thought... does management want this to be a one time change or are they willing to commit to making this change apply to anyone similarly situated in the future? If you wanted to make it more long term, you could give the vesting to any one in, for example, a "reduction in force" or "severance program" or "departmental outsourcing" (or other phrase to your suiting). One comment on "severance program" is that we backdoored a few people into 100% vesting via one-person severance programs (typically resulting from post-termination negotiations in exchange for a waiver and release).

[Peanut Butter Man]

You might want to check with the company who provided you with the plan document on whether they think using the blank line for such a special vesting provision will take the plan out of prototype status. As part of their approval process with the IRS for this plan, they would have discussed how that blank line is permitted to be used. Revenue Procedure 2005-16, Section 6.19, states that opinion letters will not be issued for plans which "include blanks or fill-in provisions for the employer to complete unless the provisions have parameters that preclude the employer from completing the provisions in a manner that could violate the qualification requirements." This is the reason the adoption agreement also states that the special vesting provision "must satisfy 411(a), must be definitely determinable, must not descriminate in favor of HCEs and must not violate 401(a)4".