11g and vesting

[Ted Munice]

A plan needs 11g to pass testing (401a26, 401a4, whatever). The regulation clearly states that providing additional accruals to terminated nonvested participants through 11g is not permitted. But you can do this if you vest those terminated nonvested participants as part of the 11g amendment. Is giving them 20% vesting OK? Less OK? Whatever vesting percentage is given, must it apply to the entire accrued benefit or just the additional accrual being granted under the amendment? Is there anything that specifically addresses this?

[John Feldt ERPA CPC QPA]

I don't recall seeing official guidance on this. 20% seems okay, but 100% would certainly alleviate any concern.

[CuseFan]

i don't think anything less than 100% vesting for a terminated participant would work because any non-vested amount would (presumably) be forfeited (assuming concurrent distribution) and I think IRS would tell you the forfeited amount doesn't count toward your test. 

If you provide benefits for actives who are or have the ability to become vested, then that might be a different story - but this would be a facts and circumstances situation you would have to justify to IRS if the plan is audited or submitted at some time in the future.

[Mike Preston]

The IRS has never said that 100% vesting is required.

[BG5150]

But is the vested amount in the amendment only to the contribution, or the entire sources.

Say Sheila has $1,000 in her PS account and is 0% vested.  She leaves in '16 and the plan has a last day rule.  The plan is forced to give her a (100% vested) $200 contribution via an 11-g amendment.

So, in March, she now has $1,200 in her account (let's ignore any earnings).  How much does she get in April when she asks for a distribution?

[Mike Preston]

In order to satisfy 11(g) the amendment must have substance.  I don't see where an existing account balance has any bearing on the issue.

[BG5150]

45 minutes ago, Mike Preston said:

In order to satisfy 11(g) the amendment must have substance.  I don't see where an existing account balance has any bearing on the issue.

My question is an operational one.  In Relius, say, she will have an account balance of $1,200 at zero percent vested, even though $200 of that needed to be vested b/c of the 11(g) amendment.  Who is going to remember 3 months later when she asks for a distributoin?  Do you put that $200 in as a QNEC?  It's not, and, to me, it should have the same restrictions as PS money.

[Mike Preston]

Pick your poison.  If the amendment calls for 100% vesting of the -11(g) benefit but leaves the existing account balance without any vesting then you adjust your administrative system to handle it.  If you can't, I see nothing wrong with attaching a statement to the report that essentially says that the administrative system can't keep up with the brilliant ideas that the compliance people have developed and should therefore not be used when determining the entitlement of said employee.

This is not uncommon.  Many people take the position that the -11(g) increases should not be reflected until the next year, either in the administrative reports or on the 5500.  The only place those increases belong is in the non-discrimination analysis.

In the case of balance forward plans it makes for a lot of fun. (or tsuris, depending on your point of view).

[FAPInJax]

You could also make your life simple and vest everything at 20%.

[K2retire]

Or use a QNEC for the contribution that you need to vest.

[Tom Poje]

I would take into consideration some facts and circumstances.

lets suppose I provided $1000 to one participant to pass nondiscrimination testing - let's say it gives it gives the person who was at 0 an e-bar of 5.00, just enough to get him into the rate group of the HCE

now if that correction is only 20% vested I would argue at that point in time, knowing full well the person is terminated and has no chance to increase vesting, that the 'substance' of the amendment has not been satisfied. you have in effect provided an e-bar of only 1.00.

or put another way, instead of provided a 20% vested contribution of 1000, I have in effect provided a 100% vested contribution of $200. I do not think that was the intent of providing a corrective amendment to pass testing.

...

under its comments on discriminatory plan design using short term employees the IRS indicates they have an issue about being able to 'pass' but failing a reasonable interpretation of what is reasonable.

I would hold that this would hold in a case of a corrective like the example I used.

Examples of short service plan designs

Some plans limit NHCE benefits to a specific job classification. The result, for discrimination and coverage purposes, is the same because this classification includes only the lowest paid or shortest service group of NHCEs.

Another variation on this plan design provides coverage to NHCEs who work on an as-needed basis and earn very little each year.

Some plan designs require 1,000 hours to earn a year of service for vesting but not for allocation purposes. In these plans, the low paid or short service NHCEs receive an accrual or allocation but don’t vest in the benefit because they never complete a year of vesting service.

Other plan designs define a year of vesting service as the employee’s completion of 12-consecutive months of employment. This design allows the NHCE participant group to become vested in the very small plan benefit.

Plans may discriminate even though they allocate a larger percentage of compensation to NHCEs. With this design, NHCEs, on average, may seem to receive a misleadingly large accrual or allocation level. For example, an NHCE participant with $200 of annual compensation may receive a profit sharing allocation of $200 (a benefit equal to 100% of compensation), while an HCE with compensation of $200,000 may receive a benefit of only 25% of compensation or $50,000.

Although these designs may allow the plan to satisfy the vesting or numeric general tests for nondiscrimination and the associated regulations, they don’t satisfy Treas. Reg. Section 1.401(a)(4)-1(c)(2), which requires that the provisions of Sections 1.401(a)(4)-1 through 1.401(a)(4)-13 be reasonably interpreted to prevent discrimination in favor of HCEs.

[Belgarath]

Yeah, how does the saying go..."Pigs get fat, but hogs get slaughtered." To my way of thinking, it just isn't worth screwing around for relatively small dollars. But, of course, it ain't money coming out of my pocket, so my views might be suspect...