Retroactive Vesting

[Dougsbpc]

We have a client that sponsors a small DB plan with 15 participants.

They have a 2-20 vesting schedule and would like to provide a more generous schedule (1 year 25%, 2years 50%, 3 years 75%, etc). In addition, they wish to make this schedule effective back to 2002. Is it possible to amend a plan to provide more generous vesting retroactively? They have only ever had 4 terminess who were all partially vested and dont mind paying additional benefits.

[Guest taxesquire]

yes, that shouldn't be a problem, although you may need to file amended 5500s

[david rigby]

404(a)(4) issue?

[Peanut Butter Man]

For a plan with 15 employees, such a change to the vesting schedule looks like it is designed to specifically benefit one participant. Who was hired in 2002 who wants 100% vesting now instead of waiting to when they are 100% vested under the plan's current 6-year graded vesting schedule? If it is an HCE, then the amendment looks as if it is designed to specifically benefit an HCE.

[Mike Preston]

404(a)(4) issue?

401(a)(4)?

[Mike Preston]

For a plan with 15 employees, such a change to the vesting schedule looks like it is designed to specifically benefit one participant. Who was hired in 2002 who wants 100% vesting now instead of waiting to when they are 100% vested under the plan's current 6-year graded vesting schedule? If it is an HCE, then the amendment looks as if it is designed to specifically benefit an HCE.

If it is retroactively effective to all, how can it possibly be discriminatory?

[Mike Preston]

yes, that shouldn't be a problem, although you may need to file amended 5500s

Surely you jest.

[Guest mjb]

can some body explain what would be the vesting % in 2007 for a participant who began service in 2002 if the vesing is retroactively amended? If it is 25% per yr then a participant who commenced service in 2002 would be 100% vested by 2005.

[Mike Preston]

In the case of a continuously employed individual, you are correct. If somebody were hired in 2002, terminated employment at the end of 2003 and reemployed at the beginning of 2006, then they would fully vest in 2007 would they not?

[Guest taxesquire]

yes, that shouldn't be a problem, although you may need to file amended 5500s

Surely you jest.

I don't understand your comment. It would not surprise me to find people on this board who know more than I - I expect there are many such people. Please take the time to educate me and the other posters.

Do you mean that revised 5500s won't be necessary b/c even though the amendment might be retroactive, employee's vesting didn't actually increase until the current year?

[Mike Preston]

Do you mean that revised 5500s won't be necessary b/c even though the amendment might be retroactive, employee's vesting didn't actually increase until the current year?

Indeed. Retroactive increases, brought about by way of benefit formula, vesting increase, or accrual pattern (or anything else you can think of but I can't at this moment) are not uncommon. Look up the history of benefit increases, retroactively applied, to most of the multi-employer plans of this country when investment returns were "off the charts." Such an increase might go back a dozen, or more, years. To suggest that a retroactive increase could give rise to an amended 5500 is not consistent with what the IRS has required in the past. And, I hope, with what the IRS will require in the future.

[jpod]

I'm not sure I am grasping all the ramifications of making the vesting "retroactive" to 2002.

Which participants do you intend to cover vs. not cover by this change?

For example, is it the intent that only individuals who were active plan participants 1/1/02 or later will be subject to the new vesting schedule? Are there people who ceased to be active participants prior to 2002 who still have vested deferred benefits in the plan?

Or, was the plan first established in 2002?

[jpod]

Mike Preston: Insofar as 401(a)(4) is concerned, the regs. do say that it is the "timing" of a plan amendment that must be analyzed for discrimination. This may not be a real issue here, and in truth the regs. give so little guidance that the rule is difficult to apply in many cases, but it is possible that an amendment which is perfectly nondiscriminatory on its face could be discriminatory under the regs. because of the "timing."

[Mike Preston]

The nature of the question lays to rest your position. Or at least it should. As I understand it, the question revolves around the retroactive nature of the amendment, not the timing of such an amendment had it been made in 2002 (or late 2001).

I will grant you that there is a possibility for a violation of 401(a)(4)-5 here. But it is so remote as to be ignorable unless the facts are truly egregious.

So, you are right to mention it. But a whisper would be the right volume, IMNSHO. Can we show whispers in BB Code?

Will you grant me the amendment's escape from the clutches of 1.401(a)(4)-5 if the amendment would have been copacetic had it been made in 2002?

[jpod]

Mike Preston: My answer to your last question to me is "maybe." I can't even begin to analyze the issue until I know what the original poster has in mind when he/she says "retroactive to 2002." Depending upon how that issue is clarified, further facts may be necessary.

[Mike Preston]

Use your imagination. Come up with *something* that would fit your own definition of discriminatory. Share.

[jpod]

Mike Preston: I'll decline the invitation. No need to work that hard, there are about a dozen example in the -5 regs.

[Mike Preston]

Not a single one of them can apply to this circumstance, though. But I'm willing to be convinced otherwise.

[jpod]

Mike Preston: This fish is not biting. Judges do not like to answer Qs which don't need to be answered or hypotheticals, and I'm not smart enough to be a judge, so you can't expect me to try.

[Mike Preston]

Yes, but I've stated that you can not do what you think you can do. Surely even a purist jurist sees the need to ensure that his or her opinion will not be overturned on appeal.

In our world, the general rule is that unless it is prohibited, it can be done. I'm saying it isn't prohibited. Asking me to prove that it isn't prohibited is impossible. The only thing that can be proven is that it *is* prohibited. I've admitted I can't come up with any scenarios where the OP's inquiry would make ethical sense and the amendment be prohibited.

You have stated that the opposite is *possible*.

Ball. Court. Yours.

[Dougsbpc]

The intent here is to simply provide better benefits to employees. The only HCE is the 100% stockholder of the corporation that sponsors the plan. They are now a very profitable company and the owner wants to reward past employees as well as future employees by having more rapid vesting.

[david rigby]

Go for it.

[Mike Preston]

Indeed. Not even jpod can object to that fact pattern!