Vesting Schedule Amendment

[msmith]

401(k) Plan - Profit Sharing vesting is 100% immediate and Match is 6-Year Graded. Client wants to amend both PS and Match to a 5-Year Graded Schedule. While the Match vesting will be more liberal, obviously the PS will not.

I have read several items and I am still confused as to how a 5-Year Graded
Schedule will apply. Can we apply the 5-Year Graded to all future PS contributions and their earnings? Or, will the 5-Year Graded only apply to new participants going forward?

[Lou S.]

You can't cut someone's vesting. The 100% vested folks will remain 100% vested in past and future profit sharing.

Anyone with 3 years service has the right to elect either vesting schedule. This may apply if the the 5 year schedule is not more favorable in all years than the 6 years schedule, though probably not. That is this is likely to have little application in this case.

The net effect is that the vesting change will apply to new participants after the later of adoption of the new schedule or effective date of new schedule for PS. For Match the 5 year schedule will probably apply to all participants with 1 hour of service after the effective date assuming the 5 year schedule is equal to better than the 6 year schedule in all year if drafted not to grant vesting increase to terminated participants.

[msmith]

That is what I thought. However, I have had an ERISA Attorney, from a very large, well-known ERISA Law firm tell us that only the vested account balance as of the Amendment date cannot be cut back.

[Lou S.]

I think if you start a brand new plan and make all the PS contribs to that you can have the vesting schedule apply to all then merge it in after 5 years. Though you'll have to grant service in the new plan at least back to the effective date of the current plan.

Ask him how his method satisfies 411(a)(10) sections (A) & (B)

[msmith]

This was ERISA attorney's comment:

The rules do not apply based on hire date, the rules apply based on whether the benefits have accrued. Generally, Section 411(a)(10) requires that participants with three or more year of service be permitted to elect to apply the pre-amendment vesting schedule to any benefits accrued at the time of the amendment. However, because those benefits are already 100% vested, this does not have to be addressed. The following is support for this conclusion: The anti-cutback rules do not apply to benefits that accrue after the applicable amendment date (Treas. Reg. Section 1.411(d)-3(a)(3)). Treas. Reg. Section 1,411(d)-3(a)(3)(i) provides in pertinent part that "The rules....apply to a plan amendment that.......places greater restrictions or conditions on a participant's rights to section 411(d)(6) protected benefits even if the amendment merely adds a restriction or condition that is permitted under the vesting rules.....However, such an amendment does not violate section 411(d)(6) to the extent it applies with respect to benefits that accrue after the applicable amendment date."

[Lou S.]

I think he may be comparing apples and oranges but then again it may just be over my pay grade.

[msmith]

Agreed!! Thank you for your informed responses Lou.

[K2retire]

I have also heard that you can create a separate money source that will hold the new (post amendment) contributions. What I haven't heard of is a record keeper who can keep that straight.

[ESOP Guy]

Something in the back of my mind says the lawyer is right. But what I can't get comfortable with is the idea then you could amend the vesting a little bit every year as it applies to the new benefit and someone even with 10 years of service would have some money not vested.

Of course any version of this tends to be a record-keeping nightmare.

I saw people mess up the people who terminated before the PPA change and after the PPA change much less something like this.

[K2retire]

But what I can't get comfortable with is the idea then you could amend the vesting a little bit every year as it applies to the new benefit and someone even with 10 years of service would have some money not vested.

You can't exclude their prior service. For example a participant with 3 YOS at the time of the amendment would be 100% vested in the old money and 40% vested in the new money.

[ESOP Guy]

But what I can't get comfortable with is the idea then you could amend the vesting a little bit every year as it applies to the new benefit and someone even with 10 years of service would have some money not vested.

You can't exclude their prior service. For example a participant with 3 YOS at the time of the amendment would be 100% vested in the old money and 40% vested in the new money.

Thanks I knew I wasn't thinking through it right. Too close to 10/15 for the mind to work 100%

[msmith]

Thanks to all that posted comments. Your input is appreciated.

[KJohnson]

I think they should go back and look at 411(a)(10)(A) and (B). If they elect the old schedule then they can have all contributions past and future calculated at the old schedule. There is no language of "(determined as of the later of the date such amendment is adopted, or the date such amendment becomes effective)" in (B) that is only in (A). So I think his conclusion that the protection under the election of the old schedule only applies to "benefits accrued at the time of the amendment" is not correct.

Even the language in (A) is open to some debate. Look at Sal Chapter 4, Section 3 Part F. Where the debate is whether the phrase in parenthesis modifies "nonforfeitable percentage" or the "accrued benefit derived from employer contributions" t

(10) Changes in vesting schedule

(A) General rule

A plan amendment changing any vesting schedule under the plan shall be treated as not satisfying the requirements of paragraph (2)if the nonforfeitable percentage of the accrued benefit derived from employer contributions (determined as of the later of the date such amendment is adopted, or the date such amendment becomes effective) of any employee who is a participant in the plan is less than such nonforfeitable percentage computed under the plan without regard to such amendment.

(B) Election of former schedule

A plan amendment changing any vesting schedule under the plan shall be treated as not satisfying the requirements of paragraph (2) unless each participant having not less than 3 years of service is permitted to elect, within a reasonable period after the adoption of such amendment, to have his nonforfeitable percentage computed under the plan without regard to such amendment.

[Belgarath]

Going from memory (so, so dangerous) I seem to recall that the IRS stance is perhaps more strict than the law, or at least a reasonable interpretation of the law. I'm remembering that the IRS says your vested percentage prior to the amendment applies not only to benefits accrued at the time of the amendment, but also to FUTURE benefits accrued. While this is arguable, most people don't want to fight with the IRS. So if prior schedule is 1 year 50%, 2 years 100%, and you have 1 year vesting credit, then plan is amended to 6-year graded, then your vesting percentage for year 2 and year 3 allocations will also be 50%, then it will be 60% for year 4. (it is certainly easier this way - whether correct or not!)

But this is from memory, and not based upon any current research.

[Tom Poje]

the example from the regs [Treas. Reg. § 1.411(d)-3(a)(4) examples 3 and 4]

Facts. Employer N maintains Plan C, a qualified defined benefit plan under which an employee becomes a participant upon completion of one year of service and is vested in 100 percent of the employer-derived accrued benefit upon completion of five years of service. Plan C provides that a former employee's years of service prior to a break in service will be reinstated upon completion of one year of service after being rehired. Plan C has participants who have fewer than five years of service and who are accordingly zero percent vested in their employer-derived accrued benefits. On December 31, 2007, effective January 1, 2008, Plan C is amended in accordance with Code Section 411(a)(6)(D) to provide that any nonvested participant who has at least five consecutive one-year breaks in service, and whose number of consecutive one-year breaks in service exceeds his or her number of years of service before the breaks, will have his or her pre-break service disregarded in determining vesting under the plan.
(ii) Conclusion. Under paragraph (a)(3) of this section, the plan amendment does not satisfy the requirements of this paragraph (a), and thus violates Code Section 411(d)(6), because the amendment places greater restrictions or conditions on the rights, as of January 1, 2008, to section 411(d)(6) protected benefits for participants with fewer than five years of service, by restricting the ability of those participants to receive further vesting protections on benefits accrued as of that date.




Employer O's current vesting schedule is 3/20
In January 2006, Employer O acquires Company X, which maintains Plan E, a qualified profit sharing plan under which each employee who has completed five years of service has a nonforfeitable right to 100 percent of the employer-derived accrued benefit. In 2007, Plan E is merged into Plan D. On the effective date for the merger, Plan D is amended to provide that the vesting schedule for participants of Plan E is the seven-year graded vesting schedule of Plan D. In accordance with Code Section 411(a)(10)(A), the plan amendment provides that any participant of Plan E who had completed five years of service prior to the amendment is fully vested. In addition, as required under Code Section 411(a)(10)(B), the amendment provides that any participant in Plan E who has at least three years of service prior to the amendment is permitted to make an irrevocable election to have the vesting of his or her nonforfeitable right to the employer-derived accrued benefit determined under either the five-year cliff vesting schedule or the seven-year graded vesting schedule. Participant G, who has an account balance of $10,000 on the applicable amendment date, is a participant in Plan E with two years of service as of the applicable amendment date. As of the date of the merger, Participant G's nonforfeitable right to G's employer-derived accrued benefit is zero percent under both the seven-year graded vesting schedule of Plan D and the five-year cliff vesting schedule of Plan E.
(ii) Conclusion. Under paragraph (a)(3) of this section, the plan amendment does not satisfy the requirements of this paragraph (a) and violates Code Section 411(d)(6), because the amendment places greater restrictions or conditions on the rights to section 411(d)(6) protected benefits with respect to G and any participant who has fewer than five years of service and who elected (or was made subject to) the new vesting schedule. A method of avoiding a section 411(d)(6) violation with respect to account balances attributable to benefits accrued as of the applicable amendment date and earnings thereon would be for Plan D to provide for the vested percentage of G and each other participant in Plan E to be no less than the greater of the vesting percentages under the two vesting schedules (for example, for G and each other participant in Plan E to be 20 percent vested upon completion of three years of service, 40 percent vested upon completion of four years of service, and fully vested upon completion of five years of service) for those account balances and earnings.
[Treas. Reg. § 1.411(d)-3(a)(4) examples 3 and 4]