Vesting tied to participation vs service

[pbarrett]

Is it possible to set up a 401(k) plan with a vesting schedule tied to the participation in the plan versus the length of service?

Thanks for any input.

[MWeddell]

The answer is a qualified yes, assuming you're talking about employer contributions other than the elective deferrals which are always 100% vested.

Vesting can be no less generous than one of the statutory schedules, but may be more generous. For example, you could have a cliff vesting schedule where a participant becomes vested upon the earlier of 2 years of plan participation or 5 years of service. You couldn't just say that vesting occures upon 2 years of plan participation.

Check with your recordkeeper before adopting such an uncommon vesting provision.

[MWeddell]

I came across this while doing some real work. If you want a more direct cite why a 401(k) plan can't use just years of participation (not years of service) for vesting purposes and have access to CCH Pension Plan Guide, see the article reprinted at paragraph 23,890O.

[Guest WBrown]

I agree that technically a plan is not supposed to base vesting service on participation, but I personally worked for a large employer in the financial industry whose own 401(k) plan did this. The plan received a favorable determination letter from the IRS.

Just so you know, this design feature was a holdover from the days when the plan matched after-tax rather than pre-tax dollars.

[david rigby]

Of course, a plan is permitted to have a vesting schedule based on years of service after the plan's effective date, ignoring all service prior to such date.