Eliminate 1% for less than 2 vesting years

[J Simmons]

A plan has had a vesting schedule dating back to the 80s that is the usual 2-6 year graded, 20% increment schedule with one twist. Those with less than 2 vesting years are 1% vested. (I presume this was to have an actual cash out and thus forfeiture following termination of employment by those with less than 2 vesting years before the deemed cash out rule was adopted.)

However, the ER would now like to amend out the 1% vesting. Otherwise, the 2-6 year graded, 20% increment schedule will remain unchanged. Understandably, those currently just 1% vested cannot lose that 1% vesting. So the change will only impact those who enter the plan as participants after the date of the amendment.

My question is whether we need to go through the rigmarole of giving those with at least 3 vesting years the option to remain with the old vesting schedule rather than being subject to the new vesting rules. Either way, it makes no difference. Someone with 3 vesting years will be 40% vested both under the old and the new schedules; someone with 4 vesting years will be 60% vested under both; those with 5 vesting years will be 80% vested under both; and those with 6 or more vesting years will be 100% vested under either the new or the old vesting schedules.

We'd like to avoid the 'election' because of (a) the administrative burden, and (b) the confusion by employees being asked to elect the old or be in the new schedule--and the suspicions some will no doubt have if we explain there's no impact, but the federal pension laws require us to 'jump through this hoop'.

Is the election required in this situation where none of those that would have the right to make the election would be effected one way or the other?

[david rigby]

Isn't there a statement from IRS: if an amendment changes the vesting schedule and all current participants (pr perhaps those with 3 YOVS) are automatically provided the better percent, then no election is needed?

[J Simmons]

Isn't there a statement from IRS: if an amendment changes the vesting schedule and all current participants (pr perhaps those with 3 YOVS) are automatically provided the better percent, then no election is needed?

Thanks, David. The regulation actually reads better, at least for my situation where it will be the same percentage. It doesn't require a 'better percent', just that the vested percentage of such individuals

under the plan, as amended, at any time cannot be less than such percentage determined without regard to such amendment

in order to avoid the election requirement. Treas Reg § 1.411(a)-8(b)(1)