Vesting Change from Immediate to 6-Year Graded

[John Feldt ERPA CPC QPA]

A profit sharing plan currently requires 2 years of service for eligibility for an employee to become a participant. Thus, the plan has 100% immediate vesting. The plan only covers non-highly compensated employees.

The plan sponsor wants to lower the eligibility to 1 year of service and introduce a 6-year graded vesting schedule. All existing Participants will remain 100% vested. How will this be handled for existing employees?

Some employees have been held out already over 1 year (some almost 2 years). However, they have not yet entered the plan and thus have no rights as a participant. Must they be 100% vested when the plan is amended to lower the eligibility, or can they be placed onto the 6-year schedule? How about those with under a year, would they be treated any differently?

[NJ Mike]

If you have the 2017 Pension Answer Book, A similar question is raised and answered.  It is in Section 9.7.  Their answer is that according to IRS representatives, the participant is subject to the new graded schedule.  There are no references to any codes or regulations.  

I have attached a copy of the page.. 

Mike 

PAB Section 9.7.pdf

[Bird]

But the amendment in the example is retroactive and he comes in a year early.  I don't think you can make someone wait 2 years, then change eligibility just as they happen to enter, and use a a graded schedule.  I think it depends on the effective date of change (retroactive or prospective) and the maximum effective waiting period for each employee.

[Mike Preston]

If somebody is held out of a plan for a period of time that exceeds what would have been called for by a 1 year wait, they must be 100% vested.

[John Feldt ERPA CPC QPA]

So Mike, you're saying the plan can apply the 6-year vesting schedule to some of the employees when the amendment is adopted. However, anyone already held out too long (e.g. past a 1 year period of service with semi-annual entry dates), those employees have to be 100% vested when the plan is amended.

[Mike Preston]

That is indeed what I'm saying.

[MPLSLAW]

Agree with Mike P.  Code section 410(a) says if waiting period is more than a year of service, vesting must be 100%...

[FormsRstillmylife]

But normally a new vesting schedule can be effective for all contributions made on or after its prospective effective date.  My 2-year ineligible employee participates, but there is no allocation in his 100% vested account.  Should the graded vesting schedule have to be effective next year in order for these employees to have an opportunity to receive an allocation in the year of participation?  The thought would be that you must amend eligibility this year and bring them in before you can amend the vesting schedule from anything but 100% vesting as of next year.

[Mike Preston]

Can somebody explain what FormsRstillmylife is saying?

[Tom Poje]

I think the logic is something like this:

ok, you can have a 2 year wait, avoid giving someone a contribution the first year, but the penalty is 100% vesting. now after 2 years I am going to get around the penalty and change the vesting to 2/20. thus I have 'cleverly' gotten around things and avoided giving you a contribution the first year. This is different than, say having a 1/20 schedule which is more generous than it need be and later amending it to a 2/20 schedule. (Of course even in those cases, you have to apply old schedule to old money, and the 3 year svc get to stay on old schedule if desired) or at least that is how I would see it.

[pjb1835]

This is from the Erisa outline book (to avoid complexities of elections, etc.):  A third approach would be to apply the amendment to the vesting schedule only to employees who become participants after the adoption of the amendment, and keep all current participants on the old schedule. That approach also eliminates the need for vesting elections and avoids the bifurcation issue, but it also means that the plan administrator would have to maintain two vesting schedules.

There is no exception to this even if the eligibility provisions were liberalized.  I'm not seeing the concern even if it is clever. 

 

[Mike Preston]

How does either get around the code requirement?

[pjb1835]

This is the language in the code.  Correct me if I'm wrong, but it is different than the regulations requiring 100% vesting if made to wait longer than the 1 year statutory. 100% required vesting applies to participants who have accrued benefits after 2 YOS AND have been made to wait 2 years.  

"In the case of any plan which provides that after not more than 2 years of service each participant has a right to 100 percent of his accrued benefit under the plan which is nonforfeitable (within the meaning of section 411) at the time such benefit accrues, clause (ii) of subparagraph (A) shall be applied by substituting “2 years of service” for “1 year of service”."

[Mike Preston]

Consider yourself corrected. It really, really says what I said.  Honest.  Maybe somebody else has the time to parse the language.

[Bird]

14 hours ago, pjb1835 said:

This is the language in the code.  Correct me if I'm wrong, but it is different than the regulations requiring 100% vesting if made to wait longer than the 1 year statutory. 100% required vesting applies to participants who have accrued benefits after 2 YOS AND have been made to wait 2 years.  

"In the case of any plan which provides that after not more than 2 years of service each participant has a right to 100 percent of his accrued benefit under the plan which is nonforfeitable (within the meaning of section 411) at the time such benefit accrues, clause (ii) of subparagraph (A) shall be applied by substituting “2 years of service” for “1 year of service”."

I'm not quite sure how you're reading this but I agree with Mike.  I suspect your misinterpretation is that you are ignoring the "not more than" phrase before "2 years of service" and concluding that you don't have to 100% vest for any waiting period up to 2 years, but of course the language immediately prior to the quoted part says that a plan isn't qualified if it requires more than one year of service.

[Kevin C]

As usual, Mike is correct.

Quote

410(a)(1) Minimum age and service conditions.

(A) General rule. A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part requires, as a condition of participation in the plan, that an employee complete a period of service with the employer or employers maintaining the plan extending beyond the later of the following dates—

  (i) the date on which the employee attains the age of 21; or

  (ii) the date on which he completes 1 year of service.

(B) Special rules for certain plans.

  (i) In the case of any plan which provides that after not more than 2 years of service each participant has a right to 100 percent of his accrued benefit under the plan which is nonforfeitable (within the meaning of section 411) at the time such benefit accrues, clause (ii) of subparagraph (A) shall be applied by substituting “2 years of service” for “1 year of service”.

Under 410(a)(1)(A), a plan is disqualified if it requires more than a year of service as a condition of participation.  The exception under (B) applies to plans that require not more than 2 years of service AND provide for 100% immediate vesting.  Under 1.410(a)-3(e)(1), provisions that have the effect of requiring age or service requirements are treated as imposing those age and service requirements.

Put it all together and the situation under discussion requires more than a year of service for affected individuals and they must be 100% immediately vested to meet the exception under 410(a)(1)(B).

[pjb1835]

Ok, I can see the 1.410(a)-3(e)(1) argument. Thanks

[pjb1835]

Kevin C.   Just to clarify, if the plan in question also removed a class exclusion with the amendment, would an employee previously in the excluded class with more than a year also have the 100% protected vesting?  This wouldn't be covered under the 1.410(a)-3(e)(1) concern, correct?

[Kevin C]

410(a)(1)(B) applies to plans that have service requirements for participation, or a situation having the effect of requiring service, of more than one year.  Assuming the class exclusion doesn't have the effect of requiring more than a year of service, I don't think those previously excluded by class would have to be 100% immediately vested when the plan is amended to allow that class to participate. If the class exclusion does have the effect of requiring more than a year of service, the plan has other problems. Of course, service completed while in an excluded class counts for participation and vesting when that class is no longer excluded or the participant moves to an included class.