Impact of Enhanced Vesting Schedule on Terminated Participants

[401 Chaos]

Plan historically had a 6 year vesting schedule but shifted to a 5 year vesting schedule when adopting a restated adoption agreement some time ago. The 5 year schedule is in all cases more favorable than the 6 year schedule. A dispute has arisen over the impact of the amended vesting schedule with respect to former employees who were not 100% vested when they separated from service and remained participants in the plan at the time of the amendment.

I had always assumed that such former employees should generally be governed by the vesting schedule in place at the time they performed services /received contributions under the plan--i.e., that old money generally tracked old rules. Others say, however, that all participants in the Plan should get the benefit of the new, more generous vesting schedule regardless of the fact that they did not perform any service after the change was adopted.

I suppose I could see where a plan could be amended to provide for application of the more generous vesting schedule across the board--to existing employees as well as former employees participating in the plan--but would that be the normal operation / intent of adopting a restated prototype adoption agreement with an enhanced vesting schedule? Couldn't an argument be made that forfeitures of the former employees under the old (less generous) schedule belong to the other participants such that giving them the benefit of the new (more generous) schedule is problematic? And couldn't an argument be made that those unvested participants who just happened to stick around in the Plan after termination instead of taking an immediate distribution or roll-over got a windfall that other former employees who had previously taken money out of the plan did not receive?

Thanks for any advice on this.

[GMK]

I had always assumed that such former employees should generally be governed by the vesting schedule in place at the time they performed services /received contributions under the plan

This is an important matter that is sometimes missed when the amendment is adopted.

Unless the plan as amended says that the former employees (as of the effective date of the amendment) stay on the old vesting schedule, they very well could benefit from the new schedule.

If vesting is based on years of service,

and if the amendment simply says that the new vesting schedule applies to participants, without excluding former employees,

and if the rest of the plan document does not exclude former employees from the effects of amendments,

then I think the former employees have a case to claim their windfall.

..but that's just my opinion for what it's worth.

[K2retire]

We've been advised that when amending a plan to move to immediate vesting, the change can ONLY apply to someone who has at least one hour of service after the date of the amendment. I'm not sure if that is specific to the prototype document we use. We were quite surprised by that answer from Corbel's legal staff.

[rcline46]

In my 35 years of working on plans and with ERISA attorneys, a change in the vesting schedule has never applied to terminated employees. Under every DOL, IRS, and PBGC audit this was never even questioned. Terminated employees fall into a different category. You must watch the language in the plan document as applied to terminated participants to active participants.

Now if the amendment or the document is drafted poorly, you just might have that problem.

[401 Chaos]

Thanks. This is very helpful. In this case, the prototype providers seem to be saying that the plan would work to provide the new, enhanced vesting schedule across the board and the plan's auditor is disputing that. It would seem an unusual result to me for the plan to provide for application of the enhanced vesting to former employees but it sounds as if that may be possible (as a matter of plan design or inadvertent drafting). We have not seen the plan documents yet.

[Guest Smokin]

I think all of the above comments are good, but as one who litigates pension pllan issues I'd be interested in knowing if anyone has any court decisions that address this issue. There are in the disability area (Fiefer v. Prudential) but I am unaware of any for pensions.