Vesting on job termination

[Guest BBowles]

A basic question: Employee is in a 401(k) plan that vests 100% in the fifth year of employment. If the employees position is eliminated, is there a rule mandating immediate vesting? The employer provides contract health services at a hospital. There is a chance that the entire contract service provider will be eliminated.

[LCARUSI]

Some points:

1) In general, there is no requirement to vest an employee if an employer dismisses the employee for any reason, including elimination of position.

2) If a plan is terminated, all non vested participants become fully vested.

3) There is an "in-between" position. If the employer discharges a large enough number of employees to cause a significant contraction in the size of the Plan, then there might be a partial termination of the plan. If there is a partial termination, the participants affected by the termination (i.e. those who were discharged) become 100% vested. Whether or not a partial termination has occured is a facts and circumstances determination.

Take a look at 1.411(d)-2 and 1.401-6(B)

[MWeddell]

I agree with LCarusi but wanted to also add that even though a partial termination is a facts and circumstances issue, the IRS uses a rule of thumb that a partial termination probably occurs if 20% of a plan's participants terminate employment. Also, partial termination is an issue that sometimes slips by employers unaware, so if you're a participant, it's worth raising the issue.

[Guest gself]

Interesting issue. Some more reading material on this topic:

Rev Rul 72-439, 1972-2 CB 223.

Rev Rul 81-27, 1981-1 CB 228.

Boruta, Peter, M.D. P.C., (1988) TC Memo 1988-172, PH TCM 88172, 9 EBC 2013, 55 CCH TCM 670.

Rev Rul 73-284, 1973-2 CB 139.

Tipton & Kalmbach Inc, (1984) 83 TC 154, 5 EBC 1976.