"Nonvested Participant" definition

[rosskeene]

Code Section 411(a)(6)(D) provides that for purposes of determining a participant's vested percentage, a plan can disregard the prior service of a "nonvested particpant" after five consecutive one-year breaks in service. Code Section 411(a)(6)(D)(iii) defines "nonvested participant" as "a particpant who does not have any nonforfeitable right under the plan to an accrued benefit derived from employer contribuitons." Here's the question: If a participant is fully vested, but takes a complete distribution of his or her benefit under the plan (such that the participant no longer has "any nonforfeitable right unde the plan to an accrued benefit derived from employer contributions"), and is rehired after five consecutive one-year breaks in service, can the plan disregard his or her prior service in determining his or her vested percentage going forward?

Sal Tipoldi's treatise subscribes to the "once vested always vested" view, but without any authority. Based on Treas. Reg. Section 1.411(a)-6©(1)(iii), it appears that whether a participant is "nonvested" should be measured at the end of the break in service priod, and not the beginning, which would argue for disregarding the prior service and making a rehire start over with zero years of service for vesting purposes.

Any help with authority would be appreciated.

[david rigby]

Try this: 411(a)(4) says "all service... except"

Then look at the remainder of (4), and (5) and (6) for help and cross references.

[rosskeene]

Thanks, but that's not very helpful. What's your answer? Can the plan disregard service prior to 5 consecutive 1-year breaks if the participant elected a complete distribution? The Code sections you cited don't answer the question. Is a participant who was vested when he terminated considered a "nonvested participant" for purposes of Code Section 411(a) if he takes a complete distribution of his account balance before being rehired after 5 consecutive 1-year breaks in service?

Code Section 411(a)(4)(D) allows a plan to disregard service "not required to be taken into acount under paragraph (6)."

Code Section 411(a)(6)(D)(i) provides that "For purposes of paragraph (4), in the case of a nonvested participant, years of service with the employer or employers maintaining the plan before any period of consecutive 1-year breaks in service shall not be required to be taken into account if the number of consecutive 1-year breaks in service within such period equals or exceeds the greater of (I) 5, or (II) the aggregate number of years of service befor such period."

Code Section 411(a)(6)(D)(ii) provides that "For purposes of clause (i), the term "nonvested participant" means a participant who does not have any nonforfeitable right under the plan to an accrued benefit derived from employer contributions."

[PensionPro]

In my opinion you have a participant who was fully vested in a benefit, you can not disregard service for vesting. I am unable to find authority for the contrary interpretation. I don't see that the language in the Code allows you to treat someone as an unvested participant simply because their benefits were paid out.

[Tom Poje]

The IRS publication 6388 for minimum participation (not to be confused with min particpation rules for DB plans)

has the following example 1 on page 7 (emphasis mine)

A calendar year plan provides that an employee may enter

the plan only on the first semi-annual entry date, January 1,

or July 1, after satisfying minimum age and service

requirements. Employee C, after 10 years of service,

separated from service in 1976 with a vested benefit. On

February 1, 1990, C returns to employment covered by the

plan and completes a 1-year period of service. C must

participate either immediately on returning or, after a 1-year

period of service, retroactively to February 1, 1990. C's prior

service cannot be disregarded because of the vested benefit

C had when separating from service. Therefore, the plan

may not postpone participation until July 1, 1990.

..........

note, it's the fact he had a vested benefit at separation from service, not that he was paid out later

[Kevin C]

Thanks, but that's not very helpful. What's your answer? Can the plan disregard service prior to 5 consecutive 1-year breaks if the participant elected a complete distribution? The Code sections you cited don't answer the question. Is a participant who was vested when he terminated considered a "nonvested participant" for purposes of Code Section 411(a) if he takes a complete distribution of his account balance before being rehired after 5 consecutive 1-year breaks in service?

The answer is No for both.

1.411(a)-4(a) has the definition of nonforfeitable. " ... if at that time and thereafter, it is an unconditional right." sounds like once vested - always vested to me. A possible future loss of vesting rights would also cause the current benefit to fail to be nonforfeitable as required by 411(a).

1.411(a)-4(a)Nonforfeitability.—

Certain rights in an accrued benefit must be nonforfeitable to satisfy the requirements of section 411(a). This section defines the term "nonforfeitable" for purposes of these requirements. For purposes of section 411 and the regulations thereunder, a right to an accrued benefit is considered to be nonforfeitable at a particular time if, at that time and thereafter, it is an unconditional right. Except as provided by paragraph (b) of this section, a right which, at a particular time, is conditioned under the plan upon a subsequent event, subsequent performance, or subsequent forbearance which will cause the loss of such right, is a forfeitable right at that time. ...

[rosskeene]

Thanks to all. I'm still not sure the Code and Regs clearly support the "once vested always vested" position. However, it clearly appears to be the consensus/conservative view.

I'll shut up now.

[Hojo]

This was actually covered/tested on the 2012 EA 2B exam. The answer is once vested always vested.