Imputed Vesting

[30Rock]

We have a 401k plan sponsored by a large medical practice. They commonly "acquire" employees, meaning recruit, medical staff from different practices around the country. It appears the employees are mainly HCE doctors, but could also include NHCE medical staff such as RNs, PRNs, etc. They have been granting these new hires with 100% vesting under the k plan, which has a 3 year graded schedule. I know there is a special merger and acqusition rule in the 401(a)(4) regs that allow a one time BRF test, but this is not an acquisition. My question is does this granting of full vesting create an annual BRF test? These employees during the first year of hire would be NHCE correct, so what would be the testing issue in the first year? In year 2 I could see testing. However, when you look at the rules for imputed service and vesting, it appears it may be ok to impute vesting or up to 5 years of service, as long as certain conditions are met - see excerpt below. Employer does not want to credit prior service with the current employer, because this is hard to track,, some of the doctors are contract employees etc. So how can they accomplish their goal in terms of drafting the plan, and if possible avoiding testing?

ERISA Outline Book

2.b. Granting of pre-participation service. Pre-participation service means any service prior to the employee's commencement (or recommencement) of participation, with the employer maintaining the plan or with a prior employer. For the granting of pre-participation service to be nondiscriminatory, the provision must apply to all similarly-situated employees, there must be a legitimate business reason to grant the service, and there must not be significant discrimination in favor of HCEs, neither by design nor by plan operation, resulting from such grant of service. Treas. Reg. §1.401(a)(4)-11(d)(3)(iii)

[30Rock]

Any thoughts?

[david rigby]

Looks like "...significant discrimination in favor of HCEs..."

If it's "hard to track" service w/ prior employer, how can the current ER know if the vesting service being granted is accurate?

Possible compromise: don't grant anyone prior service for anything, but improve the vesting schedule?

[30Rock]

There is a provision in the 401(a)(4) regs about imputing prior service up to 5 years, as long as there is a business reason, all employees are treated similarly etc. There does not have to be a controlled group relationship. Would this not help?

[david rigby]

There is a provision in the 401(a)(4) regs about imputing prior service up to 5 years, as long as there is a business reason, all employees are treated similarly etc. There does not have to be a controlled group relationship. Would this not help?

Sure it might help, but it appears the facts don't fit the regulation: per your first post, all employees are not treated similarly, and there is discriminatory application.

BTW, is the plan ever amended to document these grants of service? If not, there may be a violation of the terms of the plan itself.

[30Rock]

Yes the plan has been amended to grant vesting for each employee acquisition. Also, each time employees are hired they are all granted 100% vesting. However, sometimes only HCEs are hired. The discrimination is for the current employees who are subject to the 3 year graded schedule. We took over this plan a year ago, and found out this provision was never tested and now we may have to. Plan sponsor got real nasty about it saying prior vendor never mentioned testing. So want to be sure testing is really needed. If all employees from each facility that they pick to hire are treated the same way, there is no discrimination there. But what about the current plan participants who did not have there vesting set at 100%? Is this is a testing issue each year?