Amend vesting

[jkharvey]

Our plan document provides that if the Plan's vesting schedule is amended, then each Participant with at least 3 years of service has the option of keeping the old vesting schedule. I have been asked if this would apply even if no money has been contributed to the account subject to vesting. In other words, the plan right now only has 401k and SH money in it and no PS. The ER wants to amend to change the vesting from 100% and then start making PS contributions. Based on this plan language, I don't see how we can make new PS contributions subject to a different vesting schedule for those with at least 3 years of service. Am I misunderstanding the language?

Thanks

[401king]

You're correct. We've had a similar question come up: Does vesting apply to funds, or the participant? Or, do funds contributed in 2008 vest according to the '08 schedule, then funds deposited in '10 vest according to a new schedule.

The answer we found is that a participant retains their vesting schedule for the life of their participation in a plan. So if someone became eligible under an immediately 100% vesting schedule, then they will retain a 100% vested status for all past and future contributions.

A new schedule will only apply to employees who became eligible for the plan after the new schedule took effect.

Hopefully I'm right on this, because we spent a lot of time checking to make sure we had the right answer.

[Lou S.]

Hopefully I'm right on this, because we spent a lot of time checking to make sure we had the right answer.

We came to the same conclusion when we researched a few years ago.

[K2retire]

I've heard it argued that new contributions to a participant who was previously 100% vested could be segregated and subject to a vesting schedule. As a practical matter, that doesn't seem to work very well.

[Kevin C]

401king,

I think you are right. An amendment can not reduce the vested percentage of someone who is a participant prior to the amendment.

411(a)(10)(A)General rule.—

A plan amendment changing any vesting schedule under the plan shall be treated as not satisfying the requirements of paragraph (2) if the nonforfeitable percentage of the accrued benefit derived from employer contributions (determined as of the later of the date such amendment is adopted, or the date such amendment becomes effective) of any employee who is a participant in the plan is less than such nonforfeitable percentage computed under the plan without regard to such amendment.

[Jim Norman]

I've heard it argued that new contributions to a participant who was previously 100% vested could be segregated and subject to a vesting schedule. As a practical matter, that doesn't seem to work very well.

I began to take over a plan once where the bank administering it had done just this. I pointed out the reg quoted above that says the vested percentage is what is protected, not the vested account balance. Employer decided to stay with the bank and keep the bifurcated vesting.

[Guest Sieve]

Why not establish a new PSP with graduated vesting and make the discretionary PS contributions into the new plan?

You certainly can have separate vesting schedules for separate sources if the plan so provides, or, I beleive, if you are amending the plan to add a new/different source.

[Tom Poje]

there are examples given in the regs (they go back a few years when you could have 3/20 vesting, but they are still just as valid) even for those who have 3 years of svc choosing a vesting schedule the answer takes on some twists

(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.

Example 9-3.

(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 table:

3/20%

(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]

[Guest Sieve]

Tom -- These examples relate to benefits already accrued as of the amendment effective date, and how to determine vested percentages in those already-accrued benefits after the amendment--i.e., the earlier vesting schedule is protected as to benefits accrued while that vesting schedule was in place. That's what Reg. Section 1.411(d)-3(a) says. Reg (-3(a)) also says: "such an amendment does not violate Section 411(d)(6) to the extent it applies with respect to benefits that accrue after the applicable amendment date". So, a new condition or vesting schedule which applies only on a go-forward basis for new $$ & new accrued benefits, would be OK under 411(d)(6), although it might violate the vesting regs re: amendments. At least, that's how I undertand it.

And, if a Plan provided for immediate vesting at entry but later added a QACA, the QACA's 2-year vesting schedule could apply to the mandatory employer QACA contributions, despite the PSP/match immediate full vesting applying to current employees, because the QACA vesting schedule applied to a new & different source.