Vesting on 11g amendment

[Dougsbpc]

Have a small 401(k) plan that will fail 401(a)4 test.

They can pass by providing a profit sharing contribution of 7% of salary to an employee who terminated employment during the year. The plan does have a last day requirement.

This employee would not be vested. Can the 11g amendment make the participant vested.

The ERISA Outline book points to an example of where this was done and not challenged by IRS.

[Tom Poje]

1.401(a)(4)-11(g)(4) requires corrective amendments have substance. a non vested terminee provided a contribution that is 0% vested would not be considered to have substance.

since a corrective amendment could be in the form of a QNEC there is nothing to stop you from making the corrective contribution 100% vested.

[Dougsbpc]

Tom

Thanks for your reply.

I think the corrective amendment allows us to single out any participant and provide them with the contribution necessary to pass 401(a)4. Would this also be true of a QNEC? Would you have the ability to provide a QNEC to just one participant for purposes of the corrective amendment or would we have to follow the targeted QNEC provisions of the document (involving more than one participant)?

[Tom Poje]

I simply used the example of a QNEC to indicate that not only can you provide a contribution but you can also provide vesting as well.
1.401(a)(4)-11(g)(2) is the reg that says you can provide to an individual who did not benefit during the year.
1.401(a)(4)-11(g)(5) example 6 is the reg that says it would be inconsistent to provide a contribution to a terminated non vested individual.

this has been understood to mean as long as you provided vesting as well as the contribution you are ok.

consider a simple example. 1 HCE and 1 NHCE. the NHCE terminates with more than 500 hours but receives no contribution, and is 0% vested.

If you can't provide vesting as well as a contribution it would be impossible to fix the problem, and that certainly isn't the intent of the regs.

(all that being said, I wouldn't pick a person who quit in Jan with $100 in comp as opposed to someone who worked most of the year, if it boiled down to picking between 2 people. correcting a problem is one thing, abuse of a provision is another. of course, if a person worked less than 500 hours and terminated wouldn't be counted anyway, but I am using an extreme example)

[Dougsbpc]

In the past, we have designed plans to provide minimum vesting of 20% for this reason. Then if a corrective amendment is needed and the only available participant is a terminee who would otherwise not be vested, we would automatically have a corrective amendment that had substance.

But maybe this is not needed if the corrective amendment itself could indicate that Joe Smith shall be provided a contribution equal to 7% of his salary to meet the requirements of 401(a)(4) blah blah blah. And, Joe Smith shall be 100% vested in this contribution.

[AndyH]

How do you define substance?

Wes Welker

[BG5150]

What's the minimum vesting you would consider?

[chc93]

What's the minimum vesting you would consider?

A few years ago, I recall hearing the IRS at conferences say 10%...

[rcline46]

We use the lowest % on the vesting schedule.