Protected Benefits

[Nassau]

My client has just informed me that they have amended their vesting schedule effective 1/1/2007. The previous schedule was a 3 year cliff and they have changed it to a 5 year graded (20% per year). This new schedule applies to all contributions made to the plan after 1/1/2007. Is this permitted? My concern is that it is possible for someone to be 100% vested (who has worked 3 years) by 1/1/2007 in all amounts made prior to that date and then be 60% vested going forward.

[J Simmons]

My understanding is that those with 3 or more vesting years earned at the time of the change must be given the option, as to the post-change accruals, to remain with the old vesting schedule (3 year cliff in your case) or switch to the new vesting schedule (graded, 2-6). All amounts vested pre-change must remain vested.

Since it would be clearly against the interest of the EE's with 3 or more vesting years earned at the time of the change to go with the new graded, 2-6 year vesting, most such amendments are designed to keep those EE's in the 3 year cliff.

[GMK]

Agreed.

And if faced with this situation, I would be hoping that all the participants on the 3-year cliff schedule would stay on it.

Keeping track of who is 3-year and who is 5-year is pretty straight forward. Keeping track of two partial balances for each participant with less than 5 years of service, one portion on a 3-year schedule and the remainder on a 5-year schedule, is a little more work (at least for the next few years).

[J Simmons]

Because it would clearly be against one's interest to elect the new, graded 2-6 year schedule if you already have earned 3 vesting years by the time of the change, wouldn't it trigger reasonable suspicion by the plan administrator that someone that made the election did not understand what he was doing? Making the election vulnerable to be set aside on that basis anyway?

[GMK]

Good point, JSimmons.

Even if the participant had only one year of service under the 3-year cliff (before 2007), she/he is only 2 years from being 100% vested.

If, however, after a relevant discussion with the participant, the participant still wanted to switch to 5-year vesting (and otherwise seemed sane), I would probably allow the switch. Maybe she/he plans to leave in another year and wants the 20% instead of 0%.

[J Simmons]

Right, but giving those with less than 3 vesting years earned at the time of the change is not required by the regs, but something you might permit voluntarily. Also, for the sake of clarity, this cut at 3 vesting years for those that must be given the option between staying on the old vesting schedule or going to the new one and those that need not be given this option is unrelated to the fact that the old vesting schedule was 3 year cliff.

[Guest Sieve]

Don't forget the relatively new rule that says amounts credited to a participant's account must remain under the old (better) vesting schedule, no matter how many years the individual has been employed or participated.