Plan Termination

[KevinMc]

If a profit sharing plan terminates do all participants become 100% vested (even terminated participants)?

[ESOP Guy]

A well draft termination amendment answers your question.    I find most of the termination amendments are not well drafted.  If someone calls me before they draft that amendment this is one of the first questions I ask them to answer in the amendment.  

If the amendment doesn't say, you need to go to the document and read the forfeiture provisions in your plan document very carefully.  I have some plan documents that clearly say the forfeiture happens on the last day of the plan year of the triggering event and other say the forfeiture happens on the date of termination if they are 0% vested.  Some even say they forfeit as of the day they are fully paid if being paid their vested balance is the triggering event.  My point is some plan documents tell you exactly when a forfeiture happens so is that date before or after the plan termination date?  If before you can make a reasonable case they forfeited and are not 100% vested.  If the forfeiture date is after the termination date they are 100% vested and they got a "windfall".  

If you get through all that and still don't know I think the best answer is "yes" they are 100% vested.    

So in order:

1) Read the termination amendment- if no answer

2) Read the document- if no answer

3) Make them 100% vested

Is my take on this.   There is no hard cite in the regs that I know of.  

[justanotheradmin]

Eh, I would say §411 is pretty clear everyone's rights are non-forfeitable upon plan termination, regardless of what the plan document says ( but the document should agree with the regs) 

https://www.law.cornell.edu/uscode/text/26/411#

https://www.irs.gov/retirement-plans/terminating-a-retirement-plan

https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-partial-plan-termination

[ESOP Guy]

On 11/20/2019 at 12:56 PM, justanotheradmin said:

Eh, I would say §411 is pretty clear everyone's rights are non-forfeitable upon plan termination, regardless of what the plan document says ( but the document should agree with the regs) 

https://www.law.cornell.edu/uscode/text/26/411#

https://www.irs.gov/retirement-plans/terminating-a-retirement-plan

https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-partial-plan-termination

I agree you are reading the regs correctly. 

Let's say a plan says a 0% vested person forfeits on date of termination.  So Joe is a 0% vested person terminates employment on 10/15/2019.  The plan termination date is 12/5/2019 does Joe have any rights in the plan that become non-forfeitable on 12/5/2019?   I think the answer is "no".  

[John Feldt ERPA CPC QPA]

Or, what if the employer signs the resolution today to terminate the plan as of 12/31/2019 and some employees quit tomorrow at 0% vested and a few partially vested employees terminate the next day and take their entire vested distribution a week or two later. Do any of them vest at 100%

[pmacduff]

We have a plan terminating and there is one partially-vested terminated participant with a balance who left in 2004.

The Plan Sponsor/Administrator has repeatedly tried to get said participant to take his balance out (he is not "lost" - the PA has a valid address).  Plan Sponsor thinks it unfair that he should benefit from the Plan Termination because he left his balance in these many years.  They took the approach that he has passed 5 breaks-in-service and is not entitled to the non-vested portion.

His non-vested portion will be moved to the plan forfeiture account and he will be paid (or rollover) the remainder of his balance for the Plan Termination.  All other participants will be 100% vested on Plan Termination. 

Anyone see any issues with this?

[ESOP Guy]

5 hours ago, pmacduff said:

We have a plan terminating and there is one partially-vested terminated participant with a balance who left in 2004.

The Plan Sponsor/Administrator has repeatedly tried to get said participant to take his balance out (he is not "lost" - the PA has a valid address).  Plan Sponsor thinks it unfair that he should benefit from the Plan Termination because he left his balance in these many years.  They took the approach that he has passed 5 breaks-in-service and is not entitled to the non-vested portion.

His non-vested portion will be moved to the plan forfeiture account and he will be paid (or rollover) the remainder of his balance for the Plan Termination.  All other participants will be 100% vested on Plan Termination. 

Anyone see any issues with this?

My only issue would be to ask why didn't forfeiture happen when the 5 BIS happen?   That has got to be the latest date the document would have said it ought to have happened.  

So you had a failure to follow the document in my mind back in the 2009-2020 time frame if this person termed in 2004.   Had the document been followed this question wouldn't have even come up.   

I would recommend at least make sure your firm's procedures look for people who ought to forfeit when the document says even if they aren't paid for all clients.