Vesting

[Guest Chicchica]

When calculating the Vested Balance for a participant using the 'special formula' when certain distributions are made from partially-vested account balance in a 401(k) plan or any defined contribution plan, what is meant by the term "amount distributed"? The formula that is provided (one of the 2 formulas) is:

X = P (AB + D) - D where: X is the employee's vested portion of any amount remaining in the plan, P is the employee's current vesting percentage, AB is the current value of the account balance remaining in the plan, D is the amount distributed. Is "D" the amount distributed to the participant, or both the distribution amount PLUS any forfeitures ('distributed' from the individual's account)? For example: Mary is 80% vested, terminates service and has a 5 yr break and defrred the receipt of her payout. The plan processes a forfeiture against her account (of 20,000 - 20%). She is still 80% based on her years of service - so the formula requires "Forfeitures" for "amount distributed" and her vested account balance is $80,000 9and she is 80% vested. If she takes a partial payout of $40,000 - then what is her vested balance? Don't you have to include the forfeiture amount in this formula? 80% (40,000 + ($-40,000 payout + $-20,000 forfeiture) - $60,000 = $40,000 (because 80% x ($40,000 + $60,000) - 40,000

Also, is the Distribtuion amount an absolute value, or is the amount a negative number: For example, let's say that John is in a Profit Sharing plan and has a Profit Sharing balance of $ 100,000 and he is 80% vested. He takes a hardship withdrawal of $5,000. Is his vested balance = $77,000 (80% x (95,000+ $-5,000) - $5,000) or $75,000 (80% x (95,000+5,000)-5,000)

My head hurts

[Tom Poje]

Once she has had a 5 year break and forfeited 20% of her balance she is 100% vested in the remaining balance, so I dont see how that makes a difference if a partial distribution is taken. Or at least that would be my understanding of how it works.

[ESOP Guy]

And for your 2nd example the right answer is $75,000. The point of the calc is to make the person no better or worse off. If their vested balance before the dist was $80k and they take $5 out, the new vested balance is $75k. So use the absolute value for the distribution number.

[Guest Chicchica]

Thanks -

Ongoing maintenance of vesting is a concern (one of the concerns and part of the reason for my question). For example, would I really have to 'update' vesting to 100% after the 5 year break for Mary? Based on her credited service, she remains 80% vested.

Twist the example JUST a BIT, where Mary takes a partial distribution one week before the 5 year break in service with forfeiture processing - How is the formula applied?? And, do I really need to "update" her %

She is 80% vested based on years of service and the vesting schedule. Use the formula to determined her vested balance, after her partial withdrawal of when her account balance (market value) is $100,000. Partial withdrawal is $20,000. Based on the formula, x= p x (AB+D)-D, then x can be $60,000 or $64,000.

If the result of P x (AB+D) {use the absolute value of D} is determined, then -D (absolute value again) is applied, then the answer is $60,000 because 80% x ($80,000 + $20,000) is $80,000, and then - $20,000 is applied. OR, if the parathesis are placed differently, then the answer is $64,000 because ($80,000 + $20,000) - $20,000 is $80,000 x 80%. It is the former - $60,000. And, Mary's vested % remains as 80%.

Now, one week later the 5 year break occurs and the plan removes her non-vested amount. Her market value is $80,000 and her vested amount is $60,000. The plan removes $20,000 (the forfeiture amount), and her market value is now $60,000. After this is processed, you can leave Mary's vested % as 80% and apply the formula again to get her new vested balance. This would be: 80% x ($60,000 (AB) + $20,000=partial withdrawal + $20,000=forfeited amount) = $80,000 - 20,000 (only the partial withdrawal, not the forfeiture) = $60,000. Her vested balance is $60,000; she is 80% vested, and her market value is $60,000.

So "D" in the formula? If the "D" that is within the parathesis is both the distribution (the partial one that Mary took) AND forfeitured amounts (the $20,000 in the example), and the "D" that is subtracted is only the distribution that is made payable to the participant, then the formula works. Right?? Without 'changing' the %

I'm not a fan of changing the % once the forfeiture is processed - because what happens when Mary is re-hired (I need to 'change it' back - if I remember )

[GMK]

Maybe this will help clarify what's going on:

If she is 80% vested, then 80% of her account balance is hers (in the example, 80,000 out of 100,000). The other 20,000 isn't hers.

If she withdraws 20,000 one week before her 5 one-year breaks in service, the withdrawal comes from the portion that is hers. She can't have the part that isn't hers. After the withdrawal of 20,000, HER balance is 60,000, and 20,000 still isn't hers. Technically, at this point she is 75% vested in an account balance of 80,000.

Later, after the 5 one-year breaks in service, the 20,000 that isn't hers is removed from her account. This leaves her account balance at 60,000, and it is all hers (100% vested).

If there are withdrawals, the vesting percentage changes. What doesn't change is the amount that isn't hers.

If there is a forfeiture, the vesting percentage changes, because there no longer is any of her account that isn't hers.

To borrow Mr. Lesser's line, I hope that helps.