Service crediting in successor plans - 1.411(a)-5(b)(3)(v)

[katiejoseph]

I am interested in hearing how members would apply Treas. Reg. § 1.411(a)-5(b) to the following situation.

The plan sponsor terminates qualified Plan A on December 31, 2011. The sponsor then establishes another qualified plan, Plan B, on January 1, 2015. Plan B is a successor plan under Treas. Reg. § 1.411(a)-5(b)(3)(v)(B). Participant began employment in 2010, has 2 Years of Service under Plan A, and is a participant in Plan B. Participant remained employed and performed at least 500 hours of service (determined under Code § 411(a)(6)) in each of 2012, 2013, and 2014.

Does Participant have zero Years of Service under Plan B, or 2?

The relevant portion of the Treasury Regulations provides:

(A) General rule. In the case of an employee who was covered by a predecessor plan, the time the successor of such plan is maintained for such employee includes the time the predecessor plan was maintained if, as of the later of the time the predecessor plan is terminated or the successor plan is established, the employee's years of service under the predecessor plan are not equalled or exceeded by the aggregate number of consecutive 1-year breaks in service occurring after such years of service. Years of service and breaks in service, without regard to whether the employee has nonforfeitable rights under the predecessor plan, are determined under section 411(a)(5) and (6) except that years between the termination date of the predecessor plan and the date of establishment of the successor plan do not count as years of service.

….

© Example. The rules provided by this subparagraph are illustrated by the following example:

Example.

(1) Employer X's qualified plan A terminated on January 1, 1977. Employer X established qualified plan B on January 1, 1981. Under paragraph (b)(3)(v)(B) of this section, plan A is a predecessor plan with respect to plan B because plan B is established within the 5-year period immediately following the date plan A terminated.

…

(3) Employee D was covered by the A plan. On December 31, 1976, D had 4 years of service. D had 4 consecutive 1-year breaks in service because during the years between the termination of plan A and the establishment of plan B, he did not have more than 500 hours of service in any applicable computation period. Because D's consecutive 1-year breaks (4) equal his years of service prior to his breaks (4), plan B is not maintained until January 1, 1981, with respect to employee D.

(4) Employee E was covered by the A plan. On December 31, 1975, E had 6 years of service. E had a 1-year break in service in 1976. E also had 4 consecutive 1-year breaks in service for the period between plan A's termination and plan B's establishment. Because E's years of service (6) are not less than his consecutive 1-year breaks (5), plan B is maintained for E as of the establishment date of plan A.

(4) Break in service. A year of service which is not required to be taken into account by reason of a break in service (within the meaning of section 411(a)(6) and §1.411(a)-6)).

Treas. Reg. § 1.411(a)-5(b)(3)(v).

One could interpret Examples (3)-(4) as deeming 2012-2014 to constitute 1-year Breaks in Service. If that's the case, Participant in the example has three 1-year Breaks in Service, exceeding service credited under Plan A. Therefore, she will receive no credit for prior service for vesting purposes under Plan B.

On the other hand, one could read the last sentence in (A) to mean that one determines whether a Break in Service has occurred according to the rules of the Code, since no plan exists. So long as a participant performs at least 500 hours of service, no break occurs. However, the participant's years of service for vesting purposes do not increase in the years where no plan exists. Under this interpretation, Participant has two Years of Service for vesting purposes under Plan B.

[Belgarath]

2 years of service.

[katiejoseph]

Also curious to know if anybody has seen guidance on this issue -- my search of Checkpoint did not turn up anything.

[Mike Preston]

2.

The determination as to whether a participant has a break in service is independent of the determination as to whether a participant has a year of service. I disagree with your bifurcation. There is no way that the examples can logically be held to provide that a year where a plan is not maintained is, by definition, a break in service. If not so there would have been no need to include the language: "he did not have more than 500 hours...".