5-year vesting?

[tuni88]

A few years ago we lowered the vesting requirement in our DB plan from 5 years of service to 3. I don't remember why but I vaguely recollect we HAD TO to stay in compliance with law.

Now I run across a small company's fairly new SPD wherein they state they still have 5-year vesting. Is 5-year vesting still allowed (0% vested before 5 years, then jumps to 100% at 5)?

[J Simmons]

How new is 'fairly new' for that SPD?

For plan years beginning after 2006, cliff vesting cannot require more than three vesting years. IRC § 411(a)(2)(B) as amended by PL 109-280 (Pension Protection Act of 2006), Act § 904(a); ERISA § 203(a), as amended by PL 109-280 (Pension Protection Act of 2006), Act § 904(b)

[david rigby]

Oops. IRC 411(a)(2)B) applies to DC plans.

Perhaps the 3-yr vesting was adopted in a DB plan because:

- the DC plan was being amended and someone decided to amend the DB plan for "agreement"; or

- someone did not understand the law;

- the DB plan is a cash balance plan (special PPA-created vesting rule for these types of DB plans).

[J Simmons]

Thanks, David!

[JAY21]

Is it possible your plan went from a non-top heavy plan (less than 60% of total benefits to Key Employees) to a top-heavy plan (60% or more of total benefits are going to Key Employees). That could be another reason as Top-Heavy plans can only use a 3-year cliff vesting or a 2/20 vesting schedule, not a 5-year cliff vesting.

[tymesup]

Perhaps the vesting was changed so the DB would have the same vesting as the DC. If you were cross-testing, you wouldn't have to adjust for the different schedules.

If you were adjusting for vesting, you'd have to decide whether an old Revenue Ruling (74-166?) can still be applied for this purpose.

[ScottR]

A few years ago we lowered the vesting requirement in our DB plan from 5 years of service to 3. I don't remember why but I vaguely recollect we HAD TO to stay in compliance with law.

Now I run across a small company's fairly new SPD wherein they state they still have 5-year vesting. Is 5-year vesting still allowed (0% vested before 5 years, then jumps to 100% at 5)?

PPA requires no more than 3-year cliff vesting for hybrid plans (including CB plans). I think traditional, non-TH DB plans may still use 5-year cliff.