Vesting at termination

[ombskid]

When a DB (not cash balance) plan terminates, who gets 100 vested due to the termination:

Actives with less than 100% vesting

Terminated participants - who have not been paid out - with less than 100%

Does anyone that has been paid out or deemed paid out because of terminating with 0% vesting get "vested up" at plan termination?

[carrots]

At one time, the IRS wanted everyone paid out in the previous 5 years to now become 100% vested.

Now, I believe, they only apply that to participants paid out in the current plan year. So, if someone was paid a partially vested benefit earlier in the year, they would be required to become fully vested at plan termination.

If the plan termination is delayed until after the end of the plan year, those former participants don't need to become 100% vested.

[david rigby]

Follow the plan document. The "5-year rule" is not statutory; not even regulatory. It comes from a GCM (General Counsel Memorandum) that is specifically focused on DC plans.

Likely, the plan will guide you to vest any participant who has not yet incurred a break-in-service. This will (oversimplified) mean anyone who is active or anyone who terminated employment in the current year. For example, if plan termination date is 12/31/09 (assuming CY plan year), then anyone who terminated during 2009 will get 100% vesting.

But, if you have doubts, be sure to get advice from an experienced ERISA attorney.

[Guest Kabert]

There are @4 court cases that focus on this issue, as I recall from looking at it several years ago. I think the gist is that full vesting is generally required of every participant, plus anyone who left the plan but did not take a distribution and has not yet had a break in service.

[ScottR]

The law is a little fuzzy on this. Looking at the various categories of participants....

Active at plan termination date: Clearly get 100%

Terminated and paid in full before plan termination date: No further benefits are payable at plan termination, because any non-vested benefits were formally forfeited when the vested interest was paid out. So there's nothing left to become vested at plan term.

Terminated non-vested before plan termination date: No benefits are payable at plan termination, provided the plan contains "deemed distribution" language. i.e. that the participant is deemed to have been paid his full vested interest, thereby forfeiting non-vested benefits. If the plan doesn't contain deemed distribution language, things are much less clear. One could argue that no forfeiture occurs until the participant has 5 consecutive 1-year breaks in service, and that the non-vested benefit would become 100% vested on plan termination. A more reasonable position (IMO) would be that full vesting is required if the participant didn't have a 1-year B-I-S. This is why I always include deemed distribution language in my DB docs. BTW, I'm assuming that a partial plan termination didn't occur when the employee terminated employment; if it did, then 100% vesting must be given to all affected employees.

Terminated with partial vesting and not paid out prior to plan termination date. I generally provide full vesting at plan termination if the employee terminated in the current plan year. Otherwise, they get just their vested interests, as determined when they terminated employment.

Best!

Scott