2 Participant Plan

[Logan401]

A plan has two eligible participants in 2012, a 100% owner, and a regular NHCE.

Plan waived eligibility if hired by 4/01/2012, and NHCE was hired 03/01/2012.

Vesting schedule= 2/20%.

NHCE termed 3/15/2013.

Question:

NHCE is eligible for 2012 profit share, but is 0% vested.

The document requires immediate forfeiture for anyone that terminates employment.

I believe that the IRS position is to partially vest in this case.

Is that correct?

[Tom Poje]

I don't think so. or at least I believe what you are thinking of is the following:

Suppose NHCE worked 501 hours in 2013. Therefore, for coverage in 2013 you fail testing and a corrective amendment is needed.

The amendment must contain 'substance'. (If not, I guess that would be substance abuse!)

so to simply provide a contribution to a 0% vested terminee would not fly as a corrective amendment -you have to provide vesting as well to the corrective amendment.

Interesting, haven't thought about it before. If the document contained failsafe language, then I would have to provide a contribution to the person. At that point it is not a corrective amendment, but simply following the terms of the document. I'm not sure vesting is required then.

[Logan401]

The participant is actually eligible to receive the 2012 profit sharing contribution which we are working on now.

Participant termed this year, 2013 & has less than 500 hours so it will not affect the 2013 contribution.

So, going back to 2012, we know she is eligible to receive the contribution, and we know she is termed and 0% vested.

I believe we would have to amend to give her 20% vesting for this to be okay?

[Tom Poje]

I don't think so. I don't believe knowing future 'facts' has anything to do with it.

you look at the facts as of 12/31/2012.

If you had a crystal ball and knew she would be rehired later in 2013 would that change your stance?

[Logan401]

Very good point. I let the client know that her amount would be immediately forfeited.

In the event that she came back to service, we would replenish the amount back into her account.

Thank you Tom!

[david rigby]

Does IRS say anything about partial termination in such situation?

[K2retire]

Does IRS say anything about partial termination in such situation?

With 50% of the participant leaving, I bet it is a partial plan termination.

[Tom Poje]

arguably that may be true, but that is a fact and circumstance. If the business was suffering and the person was let go, I'd say yes. but if the person simply quit I'd have my reservation about that.

again, I think what is being referred to as far as 'vesting' goes is found in 1.401(a)(4)-11(g)(1)

...prohibits a corrective amendment being taken into account to the extent that it does not have substance...

but in this example, you are not putting in a corrective amendment for 2012. That was why I used the example of 2013 and assuming the person worked over 500 hours and terminated.

Then coverage would fail and you would have to put in a corrective amendment, and at that point apply some type of vesting because otherwise there is no substance.

[chc93]

"Then coverage would fail and you would have to put in a corrective amendment, and at that point apply some type of vesting because otherwise there is no substance."

But as you mentioned above, Tom, if the plan had fail safe language, you won't need a corrective amendment, so substance wouldn't be necessary, correct?