Top heavy vesting in owner only plan

[shERPA]

BITD I remember attending a conference session where the presenter stated that an owner-only plan with no non-key employees did not need to include 416 provisions.  The reason would be to set up a plan with a 5 year cliff vesting schedule to delay RMDs as long as possible.

But I can't find any authority for this.  410(a)(10) and the 416 regs flatly state that all plans except those mentioned in Q&A T-38 must have such provisions.  And the vesting language applies to all employer-derived benefits, not just those of non-keys.

We just took over an owner only DB and the prior firm had used a 5 year cliff vesting and in the TH section it states that the TH schedule is the plan schedule. As luck would have it, a 3 year cliff would have required 2016 and 2017 RMDs.  

Anyone know of any authority for using a non-top heavy vesting schedule in an plan with  just a single key ee/owner participant?

[Larry Starr]

IRC 401(a)(7) is a qualification requirement.  It says a plan must meet IRC 411 to be a qualified plan.  IRC 411(a)(2)(A)(ii) provides that a 5 year cliff vesting is one of the acceptable rules.

The reference above to 410(a)(10) should be 401(a)(10).

The vesting requirement for a TH plan is under 416(b)(1).  IF the plan is TH, the vesting schedule has to be one of the TH schedules (2/20 or 3 years 100%), and the 5 year cliff option is not allowed.

If we have a one man plan (who is also a key), it is impossible for the key employee share to be less than 100% (assuming  no prior employee participants). Therefore, the plan is Top Heavy, and the TH vesting has to apply.

I don't know how they justified not applying TH vesting; can you ask them for a citation?  Don't believe they can provide one.

[shERPA]

Thanks Larry, yes 401(a)(10).

I don't know who the prior firm is but will see if we can put the question to them.  But I agree, I don't think they can, I certainly don't see the authority for it.  I do this a lot with 3 year cliff, but never 5.   

I do clearly remember hearing this once at a conference session, but it was probably 15 years ago, I don't remember the speaker and certainly don't have the outline.   It's never come up in my world until now. 

Absent a relevant cite, looks like we'll need to recommend VCP for both the document failure (not providing for a 416 compliant vesting schedule) and 2 missed RMDs.