Does anyone have plans with two different vesting schedules going -- o

[Guest MMorgan]

We have a 401(k) plan with two sources of money- deferral and match. The match has always been 100% vested. The client would like to amend the plan changing the vesting schedule for the match to a 6 year graded (20% 2nd year). He is wanting to have the "future" match contributions under the new schedule. Does anyone presently have plans where an individual participant has two different vesting schedules going? Assuming the document can be drafted properly, I have a concern that it might be next to impossible to monitor because the participants can move funds between the various investment accounts. Anyone dealt with this issue? Any thoughts would be appreciated.

[Guest MDavis]

Set up another source and call it "New Match," so that you now have Deferrals, Match and "New Match" (or some more desriptive term). Apply the new vesting schedule to this new source.

Don't forget that DC vesting is based on years of service with a maximum vesting of 0,0,20,40,60,80,100.

[david shipp]

I don't think the requirements of 411(a)(10) regarding the amendment of a vesting schedule can be applied on a 411(d)(6)-type basis (i.e. one schedule applicable to a participant's account balance before a date and a different schedule applicable to a participant's account balance after a certain date). One vesting schedule would apply to all funds within the specified contribution type without regard to date of contribution.

For current participants, 411(a)(10) would require that participants with 3 years of service could elect which schedule (old or new) would apply. New participants, or those with less than 3 years, would be under the new schedule. HOWEVER, you can't take vesting away so even those participants with less than 3 years would remain 100% since that is the current schedule. Practically, the amended schedule would only apply to new entrants after adoption and all existing participants would remain 100% vested.

With regard to investment transfers, presumably the funds are maintained by source and the vesting schedule is applied accordingly.

[LCARUSI]

First of all, I think it would be a real bad idea from an employee relations point of view to announce a vesting schedule with respect to future contributions. I think the way to do it would be as David recommended - have the vesting schedule apply to new entrants to the Plan.

However, if the sponsor really wants to do this and if David's analysis is correct that it cannot be done, the Sponsor could freeze the old plan and establish a new plan with a vesting schedule. After a period of time (6 years), anyone in the new plan who also has an old plan balance would be 100% vested in both plans. The old plan could then be merged into the new plan.

I am not recommending the above gyrations. I have to believe it would be more trouble and perhaps more expensive than it's worth for the Sponsor. But if they want to do it, I think it's a valid approach.

[actuarysmith]

The last response suggests freezing the old plan and setting up another plan with a vesting schedule. I don't believe this will fly -

1) if the prior plan remains in existense, then I believe that both plans have to be aggregated for discrim testing (including benefits, rights and features).

2) if the prior plan is terminated, the sponsor would be precluded from setting up a replacement plan for a period of 12 months.

[PMC]

Why can't you do what MDavis said? 411(a)(10)says a change in the vesting schedule can't reduce the accrued benefit. Keep the participant 100% vested in the accrued benefit (as of X date) but apply the new vesting schedule to the new contributions (tracked separately). The potential here is to create the old class year vesting for certain participants for a couple of years.

But then do what David says needs to be done - if a participant has at least 3 years of service as of the date of the change they pick the schedule under which the nonforfeitable percentage is computed under the "Plan" (i.e. pre-and post amendment date accrued benefit, not just the pre-amendment accrued benefit).

[Guest RBeck]

I agree with David. Changing a vesting schedule is a prospective event, and as a practical matter, it would affect new participants only, particularly in light of the "3 year rule".

[actuarysmith]

According to the IRS alert guidelines #2 (vesting) - IRS interpretation is that the vested percentage cannot be decreased PERIOD, whether or not the benefits (or contributions) have actually been accrued yet or not. This is slightly different that what a strict reading of the code would suggest.

This means that having one schedule for "old" money and another for "new" money would be impermissable.

I think that the best thing to do would be to just have all existing participants on the amendment date fall under the old vesting scheule for all funds. The new participants after the amendment date would fall under the new schedule.

[PMC]

Sorry to resurrect this again - but if the 401(k) included deferrals only, (currently no "employer" contributions), and the plan said that everyone was 100% vested and then the plan was amended to add employer contributions, could the plan now apply vesting schedules to the different employer contribution sources?

Or would the fact that the plan simply said you're 100% vested mean that all current participants would have that 100% vesting follow them through the plan?

Or, because there never was any employer contributions nor separate vesting schedule attached to them, mean you're not changing any vesting schedule with respect to them, so the plan can include separate vesting for the separate sources? And if it's not a change then the 3 year rule to pick which one wouldn't apply?