Full Vesting Timing

[Guest Ann]

A profit sharing plan has been amended for termination. The plan did not distribute some terminated employees accounts prior to the effective date of termination. Are these participants now 100% vested? or can they still be distributed and the forfeitures reallocated? All were under the $3,500 limit. The plan document has a cash-out option. The employer just did not cash them out after termination.

[Larry M]

'tis my understanding these persons are currently participants and are now 100% vested.

[Dave Baker]

Yup, that's the clear position of the IRS ... in a DC plan the only way to truly forfeit the non-vested part is to distribute the vested part, or for the participant to have incurred five consecutive one-year breaks in service.

I've had employers try to make involuntary cash-outs just prior to the termination date, but the IRS generally balks and makes the plan provide full vesting as of the beginning of the final plan year or makes the employer prove it didn't have termination in mind when the cash-outs occurred.

[Guest LBBarr]

If the employer is ceasing operations you may want to look at Borda v. Hardy 138 f3d 1062 where the 6th circuit held that where it is impossible for a terminated employee to be rehired and regain service you may be able to forfeit accounts because they are not affected participants (depending on the plan definitions).

[Guest bswift]

I say amen to the chorus. if those folks have account balances in the plan on the date of termination, the irs will require that they be 100% vested.

[M R Bernardin]

Here is an argument, somewhat in line with LBBarr's post, which was successfully argued in the context of a 5310 filing: you do not have to take into account, for vesting purposes, service earned by an employee when the plan is not in existence. Also, with respect to a terminated employee, you do not have to grant credit for prior service credit until, upon reemployment, the employee again earns a year of service. Both of the above options may be contained in the plan's provisions. The reason terminated employees with account balances are said to have a right to 100% vesting upon the plan's termination, is because they have not yet suffered a forfeiture and thus may in the future increase their vested percentage. However, if a plan contains both of the options described above, and the plan terminates, it is clear that a former employee cannot increase his/her vesting percentage. I'm not recommending this outside the context of a 5310 filing, but it worked for me.

[David]

If a partially vested participant has had the 5 Yr BIS, I believe that would be a way out of making them 100% vested.