Vesting Change

[Guest Pension Girl]

I have 2 401k plans that are merging and Plan A has 3 year cliff vesting and Plan B has 6 year graded, and survivor plan will have 6 year graded.

How should participants in plan A that has the 3 year cliff be treated? From the way I interpret Sal Tripodi's ERISA Outline on vesting and anti cutback rules under the Heinz case, you have to protect future accruals. So someone with 1 year of service although not vested under either schedule, would still have to have the pre amendment account balance protected so it can grow into the 3 year schedule (you do this by giving the greater of for the prior balance) and you would have to bifurcate vesting for this participant until you have the same vesting under both schedules. Is this correct? I think this is why it is easier to just grandfather the 3 year cliff or give the greater of to these participants for their entire account, and apply the 6 year to new hires and participants in Plan B.

Do you then have BRF testing issues because there are 2 vesting schedules under the same plan?

I appreciate any comments!

[Tom Poje]

these are the examples from the regs

(i) Facts. Employer N maintains Plan C, a qualified defined benefit plan under which an employee becomes a participant upon completion of one year of service and is vested in 100 percent of the employer-derived accrued benefit upon completion of five years of service. Plan C provides that a former employee's years of service prior to a break in service will be reinstated upon completion of one year of service after being rehired. Plan C has participants who have fewer than five years of service and who are accordingly zero percent vested in their employer-derived accrued benefits. On December 31, 2007, effective January 1, 2008, Plan C is amended in accordance with Code Section 411(a)(6)(D) to provide that any nonvested participant who has at least five consecutive one-year breaks in service, and whose number of consecutive one-year breaks in service exceeds his or her number of years of service before the breaks, will have his or her pre-break service disregarded in determining vesting under the plan.

(ii) Conclusion. Under paragraph (a)(3) of this section, the plan amendment does not satisfy the requirements of this paragraph (a), and thus violates Code Section 411(d)(6), because the amendment places greater restrictions or conditions on the rights, as of January 1, 2008, to section 411(d)(6) protected benefits for participants with fewer than five years of service, by restricting the ability of those participants to receive further vesting protections on benefits accrued as of that date.

(A) Employer O sponsors Plan D, a qualified profit sharing plan under which each employee has a nonforfeitable right to a percentage of his or her employer-derived accrued benefit based on the following schedule:

3/20 [this was before plans were required to use the 2/20 schedule or the 3 yr cliff]

(B) In January 2006, Employer O acquires Company X, which maintains Plan E, a qualified profit sharing plan under which each employee who has completed five years of service has a nonforfeitable right to 100 percent of the employer-derived accrued benefit. In 2007, Plan E is merged into Plan D. On the effective date for the merger, Plan D is amended to provide that the vesting schedule for participants of Plan E is the seven-year graded vesting schedule of Plan D. In accordance with Code Section 411(a)(10)(A), the plan amendment provides that any participant of Plan E who had completed five years of service prior to the amendment is fully vested. In addition, as required under Code Section 411(a)(10)(B), the amendment provides that any participant in Plan E who has at least three years of service prior to the amendment is permitted to make an irrevocable election to have the vesting of his or her nonforfeitable right to the employer-derived accrued benefit determined under either the five-year cliff vesting schedule or the seven-year graded vesting schedule. Participant G, who has an account balance of $10,000 on the applicable amendment date, is a participant in Plan E with two years of service as of the applicable amendment date. As of the date of the merger, Participant G's nonforfeitable right to G's employer-derived accrued benefit is zero percent under both the seven-year graded vesting schedule of Plan D and the five-year cliff vesting schedule of Plan E.

(ii) Conclusion. Under paragraph (a)(3) of this section, the plan amendment does not satisfy the requirements of this paragraph (a) and violates Code Section 411(d)(6), because the amendment places greater restrictions or conditions on the rights to section 411(d)(6) protected benefits with respect to G and any participant who has fewer than five years of service and who elected (or was made subject to) the new vesting schedule. A method of avoiding a section 411(d)(6) violation with respect to account balances attributable to benefits accrued as of the applicable amendment date and earnings thereon would be for Plan D to provide for the vested percentage of G and each other participant in Plan E to be no less than the greater of the vesting percentages under the two vesting schedules (for example, for G and each other participant in Plan E to be 20 percent vested upon completion of three years of service, 40 percent vested upon completion of four years of service, and fully vested upon completion of five years of service) for those account balances and earnings.

[Treas. Reg. § 1.411(d)-3(a)(4) examples 3 and 4]