Vesting / Accrued Benefit

[luissaha]

Participant in DB plan earns 5 years of service between 1980 and 1985, and leaves service. Plan at that time provides for a 10 year vesting schedule. After 5 years you are 50% vested, after 6 years 60%, etc. Plan is amended in 1995 to provide for 5-year cliff vesting. Participant returns to covered service in 2005 and earns 10 additional years of service.

How do we treat the benefit accrued between 1980 and 1985 under the 10-year schedule? Does he get 50% of the accrued benefit under that schedule? Or, because of amendment to vesting schedule in 1995, does he now get 100% of that accrued benefit?

The language of the vesting amendment is not clear. It just changes the schedule effective 1995. Does not explicitly say that it was meant to be retroactive. Any help would be appreciated.

[My 2 cents]

The following is my understanding, based on typical plan provisions. The actual plan document may result in different conclusions.

First question should probably be "what is the accrued benefit after rehire?" As I recall, if the person terminated with vesting and was not paid out (they weren't, were they?), the service etc. must be bridged. You don't say what kind of formula the plan has, but suppose that it is a vanilla 1% of final average earnings per year of service defined benefit plan. Suppose that when the participant left in 1985, average earnings were $20,000. The accrued benefit would have been 1% X 5 X $20,000 / 12, or a monthly benefit of $83.33, of which half was vested. Upon rehire in 2005, suppose that the person's pay is $35,000. By 2010, the average earnings will be $35,000. By 2015, there will be 15 years of service, and the accrued benefit would be 1% X 15 X $35,000 /12, or a monthly benefit of $437.50. It is possible that the non-vested half of the $83.33 may have been forfeited after a 5-year break (NOT due to rule of parity - in the absence of a complete distribution of the vested benefit, service for a rehired participant who had attained some vesting will always be fully bridged upon rehire) if the plan contains such a provision.

On the day the participant is rehired and rejoins the plan, the vested percentage goes immediately to 100% due to the intervening plan amendment.

Unless each piece of accrual is tied to a specific period of service, when a vested participant is rehired, you recalculate the accrued benefit based on updated service and earnings. The pre-break accrual is not frozen, it is recalculated when there is a measurable change in service and/or earnings.

[AndyH]

Is this a governmental plan?

If so, it's not subject to 411 so the normal rules don't necessarily apply.

[My 2 cents]

Is this a governmental plan?

If so, it's not subject to 411 so the normal rules don't necessarily apply.

I, for one, had just assumed it was a normal ERISA plan.

Governmental plans are subject to rules so different from plans subject to Section 411 etc. that if the original post dealt with a governmental plan, it would have been incumbent on the original poster to say so. If the normal rules don't apply, how does one even approach trying to answer the question?

If the original post does not identify the plan as ERISA-exempt, it is reasonable and appropriate to assume that the plan is subject to ERISA rules in all their glory.

[david rigby]

Vesting rules for ERISA plans changed with the first plan year beginning in 1989. Upon such date, the graded vesting schedule in the first paragraph of the original post would not have been permitted.

[My 2 cents]

That's kind of a moot point. The original post had the vesting schedule switched to 5-year cliff before the person was rehired.

Wasn't the switch from the 5-15 year graded or 10-year cliff to the 3-7 year graded or 5-year cliff made somewhere even before 1995? I am thinking that it might have been part of the Retirement Equity Act, but I could be mistaken. The only vesting change I can recall from the past 10 years was to require full vesting after 3 years for cash balance and other hybrid plans, effective in 2008 when PPA came into effect for most plans.

[AndyH]

Yes REA 1985 I believe. That's why it was apparent this was not an ERISA plan.

[dwise401k]

I have a very similar personal question for prior employment years of credited service in a DB plan. . I was covered by an ERISA DB pension plan from 1974 to 1981. The vesting at that time was 10 yr cliff. I had a break in service from 1981 to 1990 when I was rehired. When I was rehired in 1990, I was advised that my prior years would be recognized as credited service once my new years of service exceeded my break in service. My annual benefit estimates eventually included benefit credit for 1974 - 1981. I retired in 2009 with 19 "new" years credited. However, the plan now says they were mistaken in crediting me with the years from 1974-1981 because I wan't vested when I left in 1981 under the schedule in effect at 1981. I believe they are mistaken and the case of DiGiacomo v Teamsters Pension Trust of Phila & Vicinity seems to back me up. (2nd Circuit Court of Appeals). Any comments? thanks

[AndyH]

It depends what the plan says. It could have said that the "rule of parity" applied in which case if you weren't vested when you left and your number of years of breaks exceeded the number of years of service, then you lose your prior service credit.

[My 2 cents]

Two comments (speaking as a non-lawyer):

1. REA did change the permissible vesting schedules, but the effective date was not immediate, so a 1985 termination could have remained under the pre-REA vesting schedule. Plans were generally amended effective in 1989 (but several years later) to accommodate REA, the Tax Reform Act of 1986, IRS non-discrimination regulations etc. Which is not to say that the plan in question was necessarily an ERISA plan but a 1989 amendment to the vesting schedule would not prove that it wasn't. If it is not an ERISA plan, then no conclusions can be drawn without a review of the plan, since, to a fairly significant extent, when it comes to non-ERISA plans "anything goes".

2. As Andy H points out in post #9, the rule of parity keys off of a comparison between the length of the pre-break service and the length of the break, and it was never permissible (that I can recall) to condition restoration of pre-break service on having post-break service as great as the duration of the break. For a plan subject to ERISA, pre-break service can only be disregarded under the rule of parity. Given that you had 7 or 8 years of service prior to the break and a break in service of some 9 years and no pre-break vesting, permanent forfeiture of the pre-break service may be correct, especially since the break was prior to any of the statutory changes in the mid-1980s in the break-in-service rules. I leave the applicability and conclusions of the cited case to others. It would not be binding in your case in any event unless it was ruled on by the Supreme Court or you are subject to the jurisdiction of the 2nd circuit.