Vesting CB/PSP Combo Plan

[Guest John Nelson]

The issue is whether the different vesting schedules present a discrimination problem with the Plan's "benefits, rights and features" (BRFs). The Cash Balance Plan is aggregated with the Profit Sharing Plan to pass (a)(4) nondiscrimination. The HCEs primarily benefit under the Cash Balance Plan and the NHCEs benefit primarily under the Profit Sharing Plan. The Cash Balance Plan has 3-year cliff vesting; the Profit Sharing Plan has 6-year graded. Therefore, the concern is that the manner in which employees vest discriminates in favor of HCEs.

I think this is the position the IRS is taking. I have seen nothing "formal'; just informal commentary from IRS officials.

However, under Treas. Reg. Section 1.401(a)(4)-11©(2), 3-year cliff and 6-year graded vesting are deemed to be equivalent vesting schedules to one another. Therefore, I think one could argue that the manner in which employees vest under the Cash Balance Plan and the Profit Sharing Plan does not discriminate in favor of HCEs because the 3-year cliff and 6-year graded schedules are treated as equivalent to one another.

Any thoughts? Thanks.

[AndyH]

I think you have stated it correctly. The IRS "informally" does not agree.

[Mike Preston]

Andy, where did you hear that the IRS does not agree? It seems kind of clear in the regulation.

[AndyH]

Boston Advanced Actuarial Conference 6/6/07. But.....

I thought it was a direct IRS Q&A but maybe not.

My notes from Joan Gucciardi's session said she expressed the view that the vesting schedules should be the same (for BRF testing reasons), and there was discussion of this, with general consensus in agreement.

I thought there was a direct Q&A on point but I don't see it. Maybe others in attendance have better memories.

[tymesup]

Rev Ruling 74-166 provides acceptable methods for comparing the benefits of two or more plans which have different vesting schedules.

[JRN]

Similar question: Cash balance plan includes QJSA and lump sum option, profit sharing plan offers lump sum only. Plans are being aggregated for (a)(4) test. Does profit sharing plan have to be amended to include QJSA? Certainly the QJSA in the cash balance plan is a "benefit right or feature". But, it seems to me that as long as the QJSA and the lump sum option are of equal value (which I think means "actuarially equivalent"), profit sharing plan should not have to add the QJSA.

Thoughts appreciated.

[AndyH]

If you look at 1.401(a)(4)-4(d)(B)(4) Permissive aggregation .......

I don't see where "comparable" or "deemed equivalent" meet the necessary standards.

It looks to me like "impossible" is a tough hurdle.

[Mike Preston]

I believe that trying to apply 74-166 would be a bit difficult after the 401(a)(4) regs were issued in 1993. Have you done so in the last, oh, 14 years or so?

[Mike Preston]

JRN, I think you would do better to start a new thread, rather than try to hijack this one. I see almost no similarity between the question asked here and yours (well, ok, maybe a tiny bit).

[Mike Preston]

I interpret deemed equivalent as removing the other requirements.

[tymesup]

I believe that trying to apply 74-166 would be a bit difficult after the 401(a)(4) regs were issued in 1993. Have you done so in the last, oh, 14 years or so?

1.401(a)(4)-1©(10):

vesting has to pass 1.401(a)(4)–11© with respect to the manner in which employees vest in their accrued benefits.

1.401(a)(4)–11©:

Whether the manner in which employees

vest in their accrued benefits under a plan discriminates in favor of HCEs

is determined under this paragraph © based on all of the relevant facts

and circumstances, taking into account any relevant provisions of sections

401(a)(5)(E), 411(a)(10), 411(d)(1), 411(d)(2), 411(d)(3), 411(e), and

420©(2) ...

11© gives examples, but nothing on the general case of different schedules for an ongoing plan.

401(a)(5)(E)(ii):

If the employees' rights to benefits under the separate plans do not become nonforfeitable at the same rate, but the levels of benefits provided by the separate plans satisfy the requirements of regulations prescribed by the Secretary to take account of the differences in such rates, the plans shall not be considered discriminatory merely because of the difference in such rates.

How would you compare two schedules without 74-166?

Nah, I haven't had to do one of these since 401(a)(26) took away IDB's.