Changing Vesting Schedules By Amendment

[Gadgetfreak]

I have done some research on the anti-cutback rules and, if I have to go that route, I understand (basically) what needs to be done. It is a pain to recordkeep that, however.

I have a simpler idea from a recordkeeping standpoint. Existing vesting schedule is 2-6 year graded. On 1/1/09, there is an amendment to make it 3-year cliff. Depending on your years of service, some years are better with one schedule than the other. So one cannot make a blanket statement that the new schedule is better.

Why can't I just create a new source of money called ER#2 with the new vesting schedule and any ER contributions made after 1/1/09 go to that new source? All existing balances will still have the old schedule?

The only possible downside is that if I were a participant with 3 years of service, should all the ER contributions made to my account BEFORE 1/1/09 be 100% vested based on the NEW schedule. My idea seems to be the most fair and the easiest to implement. Is it allowed? Am I missing anything?

Thanks in advance.

[MWeddell]

Guidance on this issue is not 100% clear, but your suggestion probably does not comply with IRC 411, nor does it comply with the parallel provisions in ERISA.

If both the pre-2009 and post-2008 contributions are the same type of contribution, such as employer non-matching, non-QNEC dollars, then the whole pot of money must comply with a vesting schedule that satisfies IRC 411. Having some money on 2-6 year graded vesting and some on 3-year cliff vesting does not satisfy IRC 411.

[401king]

I had the same question as you: Does the anti-cutback rule apply to the entire source, or the funds that have been contributed to the source (where if it were the latter, creating a source ER2 would solve the recordkeeping issue).

As the above post states, the guidance from the IRS and DOL is unclear, and can seem contradictory.

We found that the anti-cutback rule applies to the entire source, not simply the funds.

[Tom Poje]

the example #4 of 1.411(d)-3(a)(4) is a merger between a 5 yr cliff schedule and a 3/20. (this reg was written before the revised nonelective vesting schedule now at 2/20, but what the heck.)

it would seem from the example you could end up with 2 vesting schedules - or at least that is the way I read it.

"...a method of avoiding a schedule 411(d)(6) violation with respect to account balances attributable to benefits accrued as of the applicable amendment date...." last sentence " ... for those account balances and earnings."

thus the example ends up with a vesting of 3/20, 4/40, and 5/100% [a combo of the two] -

your situation is the same, except you have a 2/20 schedule and 3 yr cliff.

you end up not quite at old $ use old schedule and new $ use new.

old $ use a mofidifed old schedule