Vesting Question

[Dougsbpc]

Small 401(k) plan provides vesting credit to the profit sharing account based on years of service. Each year of service is a year in which an employee worked at least 1,000 hours.

For allocation purposes, there is no hours requirement.

The document indicates that a participant will be 100% vested upon the later of attaining age 65 or 5 years of participation. The document does not define a year of participation.

This plan has a participant who was 75 when she became eligible. She now terminated employment at age 83. She worked less than 500 hours in each of those years. Is she 0% vested or 100% vested in the profit sharing portion?

Thanks.

[david rigby]

"...5 years of participation..."? Is that the precise language in the document?

[AndyH]

If you look at section 411(a)(8) in the IRC, it says that the latest NRA is the fifth anniversary of participation (or age 65 if later), so I don't think that 5 years of participation, if later, is permitted.

[Belgarath]

I say 100%. If the document required 1 year of service with at least 1,000 hours to be eligible, then I'd say she never became a participant, but that's obviously not the case here, since she as profit sharing contributions. So she "participates" each year, and is 100% vested.

[ETA Consulting LLC]

If you look at section 411(a)(8) in the IRC, it says that the latest NRA is the fifth anniversary of participation (or age 65 if later), so I don't think that 5 years of participation, if later, is permitted.

I think this is worth repeating. There is no requirement that you have 5 years of participation, but merely the 5th anniversary of when you first participated. Participation each year (or for 5 years) is not the requirement.

Good Luck!

[Kevin C]

And for mid-year entrants, their participation is treated as starting on the first day of the plan year in which participation began. 1.411(a)-7(b)(ii)(B).

[My 2 cents]

And for mid-year entrants, their participation is treated as starting on the first day of the plan year in which participation began. 1.411(a)-7(b)(ii)(B).

Please note that the cited section of the regulation does NOT use the term "plan year", and the statutory language refers only to the anniversary of plan entry.

[Kevin C]

I'm not sure I understand your point. The applicable sentence of the cite is:

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, except that years which may be disregarded under section 410(a)(5)(D) may be disregarded in determining when participation commenced.

I've never seen a plan document use anything other than "Plan Year" in this context. Our current VS document says:

For purposes of applying the Normal Retirement Age provisions under AA §7-1, an Employee’s participation commencement date is the first day of the first Plan Year in which the Employee commenced participation in the Plan.

Of course, it becomes, "What does the plan say?".

[My 2 cents]

The IRS requires the first day of the plan year language in prototype plans, so for those plans, it would be the first day of the plan year of entry, without question. Many plans do not contain the "first day of" qualifier, and following the terms of those plans (which have not been denied determination letters) would permit forfeiture of benefits if the participant terminates after the first day of the plan year and the 5th anniversary of the actual plan entry date.

My suspicion is that the original intent was to distinguish which entry date prevails if a person becomes a participant, ceases to be a participant (say due to broken service), becomes a participant again, and so on. The 5th anniversary should be measured from the very earliest date of entry. That would not expand upon ERISA's clear language to base NRA on the 5th anniversary of plan entry, merely clarify it.