Vesting Question

[mming]

A plan was originally designed years ago with a 5-year cliff schedule and a 3-year cliff for top heavy years. When the plan was restated for EGTRRA in 2010 the vesting provisions were changed to say that a participant's interest will vest according to a 2/20 schedule, but for amounts contributed prior to 2007 the original cliff schedules would apply, specifically stating that the 3-year cliff schedule would apply for top heavy years prior to 2007. The plan actually operated liked this beginning with the 2007 plan year, although the doc wasn't amended until the EGTRRA restatement (the TPA said an amendment wasn't needed at the time and it was OK to wait until the restatement). The plan first became top heavy in 2011.

There's a participant who terminated in 2008 with a very large account balance, the great majority of which was allocated to him prior to 2007. At the end of 2006, he only had 3 years of service and his entire balance was 0% vested under the old schedule. The small contribution he received in 2007 was vested under the 2/20 schedule and when he terminated in early 2008 he had a total of 4 years of service. From 2007 through 2010 he was shown being 0% vested in the large pre-2007 amount and 40% vested in the tiny 2007 amount. Now that the plan became top heavy in 2011, I am wondering if the vesting language, which is literally written as simply as I've described above, is adequate and whether it would be correct to still consider the pre-2007 amounts 0% vested? All help is greatly appreciated.

[ETA Consulting LLC]

I don't believe he receives the increase in vesting, but be very sure you continue to read the plan. The plan seems to address the issue, but you have to read it closely. The provision you will look for is who is impacted by the change in vesting during top heavy years. Typically, this will be for only those participants who performed an hour of service during the year.

Good Luck!

[masteff]

The "no hour of service" exclusion that ETK refers to is per reg 1.416-1 Q&A V-3. BUT read your plan because the reg says "not required"... this implies that it is permissible to give top heavy vesting to persons w/ no hours of service.

V-3 Q. What benefits must be subject to the minimum vesting schedule of section 416(b)?

A. All accrued benefits within the meaning of section 411(a)(7) must be subject to the minimum vesting schedule. These accrued benefits include benefits accrued before the effective date of section 416 and benefits accrued before a plan becomes top-heavy. However, when a plan becomes top-heavy, the accrued benefits of any employee who does not have an hour of service after the plan becomes top-heavy are not required to be subject to the minimum vesting schedule. Accrued benefits which have been forfeited before a plan becomes top-heavy need not vest when a plan becomes top-heavy.