Amend Vesting

[John Feldt ERPA CPC QPA]

A plan has 4 participants, 2 HCEs, 2 NHCEs, as of 1-1-2008.

They want to amend by June 30, 2008 to provide full vesting for all participants in the plan 1-1-2008.

New entrants July 1, 2008 and thereafter are subject to the graded 20% schedule.

Any problems doing this?

[J Simmons]

How many new HCEs and new NHCEs are slated to come into the plan on 7/1/2008?

[John Feldt ERPA CPC QPA]

1 NHCE would enter 7-1-2008.

[J Simmons]

So the amendment to grant full vesting to participants as of 1/1/2008 would benefit 2 of 2 HCEs and, if counting the NHCE expected to enter on 7/1/2008, only 2 of 3 NHCEs. The timining of this amendment doesn't smell good to me.

[david rigby]

If the amendment is effective 06/30/08, should the 07/01/08 new participant be part of the decision process?

[John Feldt ERPA CPC QPA]

I'm not sure. I don't think so, I find no requirement to include them for testing the amendment for discrimination.

[JanetM]

Since the person who would enter on 7/01/08 would not have earned a right to enter the plan until after 6/30 is over. If the plan is amended before 6/30 then the participant will follow eligibility of plan as it is written on 7/01.

I agree with John that this smells bad. If this is small company that thinks it will grow in the future - vest all those employeed and treat new hires different. Seems to be slap to NHCE who must know about the plan to change it like this. You WILL have to give out SMM so it will be noticed.

[david rigby]

Seems to be slap to NHCE who must know about the plan to change it like this.

I disagree with that conclusion. The proposed amendment does not harm any participants; does not harm any employees. Why does that "smell bad"? Rather than a slap, it looks like a pat on the back for those who get the vesting.

[JanetM]

David, what a moral buster for the participant who enters on 7/01 is what I meant. Plan has vesting schedule that was applicable to all, but now it only apply to the new guy/gal. What a way to promote loyalty and hard work.

[John Feldt ERPA CPC QPA]

Glass half empty person says = bummer for the most recent hire.

Glass half full person says = you two helped get our company started, here's a small reward.

Both good points, which stem from individual attitude and/or perspective in general. But I'm really looking for "you can't do this because <insert cite here>". I haven't seen anything like that here or in our own research yet.

[Kevin C]

Were there any NHCE participants who terminated before 6/30/2008? If so, you may have a problem with the amendment. It does not look like you have to consider the 7/1/2008 entrant in the determination.

1.401(a)(4)-5(a)(2) Facts-and-circumstances determination. --Whether the timing of a plan amendment or series of plan amendments has the effect of discriminating significantly in favor of HCEs or former HCEs is determined at the time the plan amendment first becomes effective for purposes of section 401(a), based on all of the relevant facts and circumstances. These include, for example, the relative numbers of current and former HCEs and NHCEs affected by the plan amendment, the relative length of service of current and former HCEs and NHCEs, the length of time the plan or plan provision being amended has been in effect, and the turnover of employees prior to the plan amendment. In addition, the relevant facts and circumstances include the relative accrued benefits of current and former HCEs and NHCEs before and after the plan amendment and any additional benefits provided to current and former HCEs and NHCEs under other plans (including plans of other employers, if relevant). In the case of a plan amendment that provides additional benefits based on an employee's service prior to the amendment, the relevant facts and circumstances also include the benefits that employees and former employees who do not benefit under the amendment would have received had the plan, as amended, been in effect throughout the period on which the additional benefits are based.

As mentioned, there may be reasons outside of the plan to include the 7/1/2008 entrant in the 100% vesting.

[John Feldt ERPA CPC QPA]

Good question. There were no non-vested terminations prior to this time (the plan's only 2 years old).

-Thanks!

[BG5150]

Plus, there is no guarantee the guy (or gal) is going to enter the plan on 7/1. People have been know to quit or get fired before their eligibility date.

[J Simmons]

So, the implicit interpretation of Treas Reg §1.401(a)(4)-5(a)(2) being made in this thread is that when the regulation says HCEs and NHCEs it really means only HCE participants and NHCE participants? Any authority for interjecting that limitation?

Treas Reg §1.401(a)(4)-12 defines HCE as "a highly compensated employee as defined in §1.410(b)-9 who benefits under the plan for the plan year (within the meaning of §1.410(b)-3)".

Treas Reg §1.401(a)(4)-12 defines NHCE simply as "an employee who is not a HCE".

Per such definition, J4FKBC's "NHCE expected to enter on 7/1/2008" does not seem to be excluded from the consideration to be made per Treas Reg §1.401(a)(4)-5(a)(2).

[John Feldt ERPA CPC QPA]

That is a fine line, and certainly should be considered during the decision making process. I am not sure, just from those cites alone, that such an amendment to vest eligible participants only would be discriminatory.

[J Simmons]

Uncertainty that could be avoided by allowing the vesting amendment to apply to that 7/1 entering NHCE (and the vesting requirement to apply only to those hired after so amended).

[Kevin C]

I was reading the first sentence in the cite I posted as the authority for excluding the potential 7/1/2008 new participant from the determination.

1.401(a)(4)-5(a)(2) Facts-and-circumstances determination. --Whether the timing of a plan amendment or series of plan amendments has the effect of discriminating significantly in favor of HCEs or former HCEs is determined at the time the plan amendment first becomes effective for purposes of section 401(a), based on all of the relevant facts and circumstances.

In this case, the determination is made as of the June effective date of the amendment. The potential 7/1/2008 entrant is not a participant in June. How can he be affected by an amendment before he becomes a participant?

[Kimberly S]

I've heard one attorney argue that anyone employed at the time of the amendment cannot be "cut back" even though they are not yet a participant because they were promised the old benefit when hired. I've heard attorneys whose judgement I trust argue differently, but it's worth considering.

[david rigby]

... anyone employed at the time of the amendment cannot be "cut back" even though they are not yet a participant because they were promised the old benefit when hired.

This principle may be relevant when discussing governmental plans, but if it's an ERISA plan, this is nonsense. Both IRC 411(d)(6) and the corresponding regulations refer to "participant".

[J Simmons]

For the rule against cutbacks, the 411d6 statute and regs protect the benefits of participants.

For minimum coverage under 410b, some employees that are not participants must be taken into account in testing, such as part-time employees excluded under the terms of the plan but who have earned one (or two) eligibility years of service.

For nondiscrimination under 401a4, including the regulation about timing of amendments, the regs specify HCEs defined to be such who benefits under the plan for the year, and NHCEs as any employee not an HCE as so defined.

[Kimberly S]

Glad to hear that you agree with what I've always understood.

The questionable attorney (working for a brokerage firm home office) was on a conference call with me and the client, contradicting what I had just told the client. Since I am NOT an attorney, I quickly back pedaled and suggested that the client consult their own attorney.