Cash Balance plan vesting & IRC section 411(a)(4)(A)

[AdKu]

Data for Question

Plan effective date: 1/1/2008.

Type of plan: Applicable defined benefit plan (cash balance).

Vesting service: Plan years in which the employee works at least 1,000 hours.

Normal retirement age: 62.

The plan has the most restrictive method allowed under IRC section 411 for determining vesting.

The employees shown below were originally hired on 1/1/2011.

No employee has left service under the terms recognized under the special rule for paternity and maternity absences.

Employee 1 Employee 2 Employee 3 Employee 4

Age at hire 18 25 16 60

2011 hours 1,901 1,956 1,325 1,254

2012 hours 1,850 0 700 565

2013 hours 1,251 1,210 1,743 779

2014 hours 1,801 355 943 1,645

2015 hours 1,583 1,479 1,100 560

 

Question

How many of the employees listed above are vested by 1/1/2016?

(A) 0

(B) 1

(c ) 2

(D) 3

(E) 4

According of SOA answer key, D is the correct answer.

I have difficulty to understand because if I exclude service prior to attaining age 18 under IRC section 411(a)(4)(A) then I will end up 2 employees by applying the 3 year cliff vesting for cash balance plan.

Am I missing something hear?

 

 

Please help.

 

 

[BG5150]

EE 1: 5 years

EE 2: 3 years

EE 3: 2 years

EE 4: 2 years

At first it looks like only 2. But EE 4 turned 62 in 2013 and became 100% vested at NRA. So, now you have three.

Just my guess.

[John Feldt ERPA CPC QPA]

Agree. The 4th employee is fully vested due to having reached normal retirement age, thus your 3rd vested employee.

[BG5150]

What test was this for?

[Mike Preston]

BG, did you mix up 2 and 3?

[BG5150]

BG, did you mix up 2 and 3?

# 2 had 1,000 hours in '11, '13 and '15 (3 years.)

# 3, same thing. But we ignore '11 & '12 because they are before age 18.

[Mike Preston]

Got it.

[AdKu]

BG, it was for Enrolled Actuary Exam.

Thank you all!

[AdKu]

can a cash balance plan define NRA - Latest date allowable under the law.

·         Normal Retirement Age is the later

a. Attainment of age 65, or

 

b. 5th anniversary of participation

 

If so, suppose Employee 4 was age 65 with 2 years of vesting service (2 years more than 1,000 hours).

Will Employee 4 still be among the other vested employees?

Does the definition of the plan NRA dictates, generally speaking, the vesting percentage in a situation like above?

 

 

[Mike Preston]

It is not "5th anniversary of participation", it is "5th anniversary of the first day of the plan year during which the participant first participated".

With that change the answers to your questions are: 1) Yes, it it fine in a CB plan and, 2) Employee 4 will be credited with two years of vesting service and will vest in accordance with the vesting schedule (which if it is 3 -year cliff it will be 0% vesting).

[My 2 cents]

7 hours ago, Mike Preston said:

It is not "5th anniversary of participation", it is "5th anniversary of the first day of the plan year during which the participant first participated".

With that change the answers to your questions are: 1) Yes, it it fine in a CB plan and, 2) Employee 4 will be credited with two years of vesting service and will vest in accordance with the vesting schedule (which if it is 3 -year cliff it will be 0% vesting).

The law doesn't say that, and the IRS regs do not refer to plan year.  It is reasonable to interpret the IRS regs as providing a way to distinguish between which participation date among several is the one to be used for ERISA's 5th anniversary of plan entry requirement.  Which is of no comfort if one is dealing with a prototype plan, since the LRMs require that language in any event.

[Calavera]

1.411(a)-7: “For purposes of subdivision (ii)(B) of this subparagraph, participation commences on the first day of the first year in which the participant commenced his participation in the plan”

[Mike Preston]

29 minutes ago, Calavera said:

1.411(a)-7: “For purposes of subdivision (ii)(B) of this subparagraph, participation commences on the first day of the first year in which the participant commenced his participation in the plan”

Thanks, Calavera, for saving me the time to look that up!

[My 2 cents]

35 minutes ago, Calavera said:

1.411(a)-7: “For purposes of subdivision (ii)(B) of this subparagraph, participation commences on the first day of the first year in which the participant commenced his participation in the plan”

Just as I said - nothing tying it to plan years.  If they meant "first day of the first plan year", they would have said so.  They didn't.  And that quote is, in context, in a place where the focus is on what to do if the person had more than one plan entry date.

ERISA (as amended) clearly calls for NRA being tied to the 5th anniversary of plan entry with no mention of the start of a plan year. 

Plans defining NRA as the later of age 65 or the 5th anniversary of plan entry (with no mention of the first day of a plan year) have been getting determination letters for over 30 years, and if that is what the plan says, administration must follow that.

[Mike Preston]

Are you being serious? smh

[My 2 cents]

Having heard of instances where someone who entered a calendar year plan on July 1 and who terminated employment (without the requisite service for vesting) before July 1 of the year containing the 5th anniversary of entry was denied any plan benefits due to not having reached NRA (and was therefore not vested), as well as early and late retirement adjustments having keyed to NRA being the exact 5th anniversary of entry and not to NRA being the first day of the plan year containing the 5th anniversary, yes I am being serious.  That sort of thing has been going on for years and years and years and those plans are not in violation, since the plan (which had no trouble receiving favorable determination letters) called for exactly that treatment.

That the regulation itself does not refer in any way to "plan years" is of great significance, and interpreting the regulation by presuming that they "must have meant" it to refer to "plan years" is just wrong (especially given the care lavished on regulations issued back then).  The requirement that one must go back to the beginning of the plan year is entirely absent from ERISA or its legislative history and the so-called requirement that NRA should key off of the beginning of the plan year is incompatible with the clear statutory language.  That, together with the regulation not even using the phrase "plan year", should be  determinative.  Looking at the regulation itself, in context that part of the regulation was surely intended to differentiate between the 8 different plan entry dates for a particular person, to specify which one of the 8 is to be used to determine the 5th anniversary of entry.

[Mike Preston]

I guess we are just going to have to agree to disagree. You think the regulation doesn't specifically reference plan year.  I think the language used makes sense only if it most assuredly does. You think that anecdotal evidence of individually designed plans that have ignored the regulation's clear intent and nonetheless received determination letters constitutes some sort of precedent.  I don't.  I think that clients administering plans in accordance with your interpretation should be warned that their participants have potential ERISA claims against the plan.  I gather you don't.

Fair enough.