Changing a Vesting Schedule

[Guest Steve Nolan]

The client is indicating that they want to administer the change as follows:

If you have more than 2 years of service regardless of whether you have reached 5 years or not, you will be vested in old money and new money and therefore not subject to the new 5 year cliff.

If you have less than 2 years, you will not be grandfathered and all of your prior and future contributions will be subject to the new 5 year cliff vesting schedule.

I agree that there is definitely an anti-cutback issue to consider. The client is indicating that there is a "loophole" that exempts them from grandfathering because their old vesting schedule was less than 3 years. Has anyone ever heard of this? Any thoughts?

[LCARUSI]

You have to give anyone with more than 3 years of service the choice to remain under the old vesting schedule - with respect to prior AND future contributions. They will all elect that - so you are now only cocerned with people with less than 3 years.

For that group (less tha 3 years), I think you can put them all on the new schedule, but anyone who is 100% vested (2+ years) must remain 100% vested with respect to their account balances as of the date of the amendment.

To summarize:

3+ years ==> stay on old schedule with respect to prior and future contribs

2-3 years ==> 100% vested on current account balance, new vesting schedule with respect to future contribs

0-2 years ==> new vesting schedule with respect to prior and current account balances

By the way, I think it would be incredibly foolish from a PR point of view to tell current employees (0-3 years of service) that you are upping the vesting from 2 to 5 years. This change should only apply to new employees.

[Guest Steve Nolan]

I have a client who is changing their vesting schedule from 2 year cliff to 5 year cliff. The question is: do people who are not yet vested under the 2 year cliff schedule need to be grandfathered under the old vesting schedule for benefits which they have already accrued or can these benefits be subjected to the new vesting schedule since they are currently 0% vested in their current benefit anyway. I believe that they should be grandfathered but there is a dispute among several people who claim that the law can be interpreted either way. Does anyone have any opinion or source information that can back up either side of the argument?

[Guest ERead]

I think that you may want to address the "anti-cutback" issues here.

The money participants currently have invested, usually stays under the old schedule. For future contributions, participants will be under the new schedule, and have a separate account for those monies.

This can be an administrative headache, and you may just want to grandfather them in, but you can elect to do as I've indicated above, as far as I know. Sorry that I don't have any specific sites for you, perhaps someone else will.

Good luck.

[LCARUSI]

Steve -

I was writing my repsonse to your first posting while you were writing your second one in which you describe your client's specific plan to implement the new vesting schedule.

What your client is doin is fine. There is no cutback issue here.

[Guest Steve Nolan]

Thanks for your input. Our attorneys concurred that what the client is doing is legally ok. It looks like their only problem is going to be with PR and communications.