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100% vesting for a reduction in force (not a partial term.)


Guest Iwonder

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Is it permissible to 100% vest participants who are losing their jobs because the division in which they work is being dissolved?

This is not a partial plan termination (not 20%).

Could vesting only the few participants affected be justified as "event-based vesting", when other participants in the plan, who are not in the terminated division, would not have their vesting accelerated?

Thank you

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Yes, the plan can be amended to provide vesting more generous than the minimum required.

Cautions:

1. make sure your amendment does not discriminate in favor of HCEs

2. step back and think about whether such amendment creates a precedent you might not want.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Yes, the plan can be amended to provide vesting more generous than the minimum required.

Cautions:

1. make sure your amendment does not discriminate in favor of HCEs

2. step back and think about whether such amendment creates a precedent you might not want.

Thank you very much!

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  • 4 months later...
  • 9 years later...

I would like to revive this thread to check back for any additional thoughts and also to change / slightly expand the question. 

This advice has always matched my understanding of the general rules and potential areas of concern but I was curious if anyone was aware of other potential concerns or had other thoughts or suggestions to keep in mind.

Also, we are considering accelerated vesting in the case of a sale of a subsidiary / division of a company rather than a RIF situation.  We anticipate most employees will be picked up by the buyer--either by law or transfer of employment--although a few may be let go in connection with the transaction.  (Unclear whether this will be a stock or an asset deal yet.)  The parent 401(k) plan will remain and there will not be a spin-out or transfer of affected participants' accounts under the parent 401(k) plan in connection with the sale apart from participants' ability to roll over their 401(k) accounts once separated.  In connection with the sale, parent wants to accelerate vesting and make all of the affected division's participants 100% vested so they forfeit nothing as a result.   Parent does not anticipate the transaction resulting in a partial termination if vesting is not accelerated but assumes an added benefit of providing full vesting will be that they avoid having to worry about partial termination issues.

Assuming that is all ok generally, here are my additional questions:

1.  What if the sub / division has a higher HCE concentration than the controlled group / plan as a whole?  Does that potentially give rise to arguments that the amendment here discriminates in favor of HCEs?  Does what they've done in other transactions possibly impact that analysis?   Who, as a particular matter, investigates this?  (We are not talking a huge difference and there has been no effort to game the rules by moving or concentrating HCEs in this sub--just this particular line of business has more HCEs than other divisions within the company.  The sale here also is motivated by clear and objective business / economic reasons without any attempt to game the vesting rules.   The plan only requires a couple of years for full vesting generally so the acceleration is not all that great in any case.)

2.  If they provide full vesting here but then experience other significant departures in connection with other transactions / RIFs  in the near future, my understanding is they would still need to count these vested participants as having an involuntary termination and thus counting toward future partial termination counts even though they are 100% vested. 

Thanks

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