top-heavy vesting schedule

[JustnERPA]

A profit sharing plan uses a 6-year graded schedule for it's employer allocations. The plan has never been top-heavy, but in a couple of years it will very likely become top-heavy.

The adoption agreement has a slot for electing a vesting schedule for top-heavy purposes. That section states for any year the plan is top-heavy, the top-heavy vesting schedule applies to the extent that it is more favorable than the plan's regular vesting schedule.

For some reason, the top-heavy vesting schedule is a 5-year graded (0,20,40,60,80,100) - one year quicker than the 6-year schedule. The employer would like the 6-year schedule to be applied when the plan becomes top-heavy.

The document then goes on to say that the top-heavy vesting schedule applies to all benefits within the meaning of 411(a)(7) except those already subject to a schedule that vests at least as rapidly as the schedule above. And only for participants with an hour of service after the plan becomes top-heavy.

The plan document spells out some rules for amending the plan's vesting schedule. Since the plan is not top-heavy yet, do those rules for amending the schedule apply to the top-heavy vesting schedule?

If they do apply, the plan states employees with 3 years vesting "may elect to have the nonforfeitable percentage computed under the Plan without regard to such amendment." With the plan currently not top-heavy, that election does nothing - they are still on the 6-year schedule. What choice are they making, for example, between schedule A or B: what would be vesting schedule A vs. what is vesting schedule B that they get to elect from?

[ETA Consulting LLC]

Did you restate for PPA?

Good Luck!

[JustnERPA]

Yes, the above references are from the PPA document/adoption agreement.

[ETA Consulting LLC]

There is no change in vesting required.  Not sure how and why the document would mandate one when the existing schedule already satisfies top heavy. My PPA document doesn't even address "when the plan becomes top heavy" as the existing schedules already meet the requirement.

Good Luck!

[Bird]

2 hours ago, JustnERPA said:

the top-heavy vesting schedule is a 5-year graded (0,20,40,60,80,100) - one year quicker than the 6-year schedule.

That looks like 20% in the second year and 100% in the 6th to me...

[Lou S.]

How big is the Plan? Amend it now and make a list of everyone with 3 years but less than 6 at the time of the amendment. Make sure you preserve the pre-amendment vesting schedule for that group. In all likelyhood if the plan isn't going to be top-heavy until "a few more years" that group will already have 6 years of vesting and be 100% vested and the TH schedule won't matter for them.

[JustnERPA]

1 hour ago, Bird said:

That looks like 20% in the second year and 100% in the 6th to me...

Sorry I wasn't clear, it's:

0% with 0 years of vesting service

20% with 1 year

40% with 2 years

60% with 3 years

80% with 4 years

100% with 5 years of vesting service

[david rigby]

8 hours ago, JustnERPA said:

The employer would like the 6-year schedule to be applied when the plan becomes top-heavy.

Too bad.  That's what TH is for. 

BTW, some good consulting might review the actual turnover and measure how much impact the TH schedule will "cost" (maybe not much).  Good consulting might also review the plan demographics and consider whether there is something to delay to plan becoming TH (maybe, not necessarily).

[BG5150]

If the plan isn't TH now, no one is subjected to that schedule.

Can't you just amend the plan to have the TH schedule match the regular one?  There's no cutback b/c no one is currently on that vesting schedule.