Is 100% vested required?

[MarZDoates]

Two participants terminated employment in July, 2019.  They are zero% vested.  

The plan document says if participant’s vested account balance is zero, the participant is deemed to have received a distribution.  (Plan allows for “immediate” distribution upon termination of employment.)

Document further says that participants receiving a distribution shall forfeit the non-vested portion of their account as soon as administratively feasible after distribution (but no later than end of plan year during which distribution occurred). 

Plan sponsor decides to make a profit sharing contribution for the 2019 plan year.  It’s new comparability with each person in their own class.  The goal is to maximize the owner’s contribution.  In order to do so, the terminated eligible participations require an allocation to pass non-discrimination.  Plan does not have a last day or hours requirement to receive an allocation.

Contribution has not been deposited into the plan yet.  Under normal circumstances, I would think the contribution needs to be deposited to the plan, but since they term’d with zero vested balance, the amount can be forfeited.

Here’s the kicker:

Sponsor is terminating the plan in 2020.  

One thing I read is that anyone with an account balance is fully vested upon plan termination.   Do these term’d employees have an “accrued” account balance?

The other thing I read says “In General Counsel Memorandum 39310 (1984), the IRS ruled that participants who separate from service and are paid their vested accrued benefits need not become further vested if the plan terminates.”

Should the two terminated participants become 100% vested in this instance?  

[ESOP Guy]

What happens to the forfeitures?   Do they get reallocated or do they reduce the ER contribution? 

When you allocated the contribution did they immediately forfeit the contribution?  If so, what happened to those dollars?  If not, why not?  

What did their participant certificate show as their total  (not vested) account balance as of 12/31/2019?  

I guess I am not sure we have enough facts to know.

Although this goes back to one of my things.  This is where a good termination amendment could have solved a lot of issues.  It would have spelled out clearly how to handle when a person becomes 100% vested. 

My initial reaction is when the money is deposited isn't the driving factor here.  The contribution was allocated as of 12/31/2019 and they shared in that allocation.  What happened after that allocation happened seems to be important.  

[MarZDoates]

The plan document permits forfeitures to reduce employer contributions or pay plan expenses.  We haven’t issued the certificates yet, but the 2019 certificate will show $0 beginning balance plus $800 contribution  =  $800 total value, $0 vested value.

The assets are in a pooled account with balance forward accounting.

The amendment reads:  “The accounts of the participants in the Plan shall be 100% vested as of the date of the plan termination.”

My initial thought is that they should be fully vested.  Then I may be overthinking.

[Bird]

Interesting.  The fact that it is pooled means the contribution does not have to be made before the forfeiture occurs, IMO.  I think you can make a case that the contribution is allocated as of 12/31 and then is immediately forfeited in 2019 due to termination of employment.  That means those same forfeitures that arise from the contribution being made reduce the contribution accordingly.

We generally don't write plans with immediate distributions for a lot of reasons, but in this instance, it seems to have a "positive" impact (if the goal in fact is to not vest these participants).  Even if the language said they are paid the following year (and forfeit then) I think a strong case could be made that this occurs on 1/1, presumably before the date of termination, with the same result - they forfeit before the date of termination of the plan.  In a strict mechanical sense, I think you are on firm footing.

I'm not so sure about other potential discrimination issues though.  Might it be a partial termination if those terms were connected to the ultimate closing of the company, if that's the reason for the termination of the plan?  Just the close proximity to the termination of the plan is not smelling very good.  I've mentioned before that back in the days when we submitted plans for approval upon termination, the IRS would request info on terminees in the last 5 years...it never caused a problem, although I found it kind of irksome that they would want to poke around at someone who term'd 3 years earlier, but I think they were looking for patterns, and this pattern is pretty bad.  

It might depend on the overall size of the plan but I'd lean towards vesting them as part of the termination, due to potential discrimination issues.

[ESOP Guy]

Maybe I am overthinking it also.....

But to me the next question is why does the person have $800 in their account as of 12/31/2019?  This is the real issue.  Once you solve this I think you have solved your vesting problem. 

If the plan says a 0% vested person gets a deemed distribution upon termination and forfeits why didn't this person forfeit as of 12/31/2019? 

I will admit at this point since ESOPs can't do New Comp structure there might be a good reason related to that I don't know about.  I haven't worked on  New Comp plan for over 9 years.  

It could be this was how you solved the infinite loop problem where they get a cont, forfeit it but share in the forf that are reallocated.  That gives them a balance they should forfeit.....

That should have been solved by amending the plan to stop the infinite loop from happening in my opinion. 

But based on what I am seeing so far to me it looks like this person shouldn't have an ending balance as of 12/31/2019 and that would solve the issue.  They have no balance to become 100% vested in. 

However, if there just has to be a balance in this account as of that date the next question is do they forfeit on 1/1/2020?  After all you are supposed to deem distribute and forfeit them as soon as administratively possible.   If not, they are 100% vested seems to be the answer as they had a balance when the plan was terminated. 

Once again to me your real problem is you have someone who is 0% vested as of 12/31/2019 with a balance in a plan that says that can't happen.  I think you need to go back and decide if that can really happen under the terms of the plan. 

It would be interesting to see if one of the people who do more work on New Comp plans thinks of this.   And that is the one limit to my answer in this reply. 

[Jeff Hartmann]

<<The goal is to maximize the owner’s contribution.  In order to do so, the terminated eligible participants require an allocation to pass non-discrimination. >>

Though I am not a Testing expert, I question whether you can use current year allocations (non-vested) that are fully forfeited in the same testing year, in order to "pass non-discrimination" for that same year.  In our company's testing, we ignore such allocations.

.....   Jeff

[Bird]

16 hours ago, Jeff Hartmann said:

Though I am not a Testing expert, I question whether you can use current year allocations (non-vested) that are fully forfeited in the same testing year, in order to "pass non-discrimination" for that same year.  In our company's testing, we ignore such allocations.

Well I just had a well-written tome but somehow lost it but long story short, I think you are right.  I was focusing on the 100% vesting issue on termination but the other issue is 401a4 nondiscrimination, and the Carol Gold memo, while not addressing this specific situation, is, I think, relevant.  We are told that "the terminated eligible participations require an allocation to pass non-discrimination" - not, e.g. to meet the gateway test, which is cut and dried; these are optional allocations that could be $800 or $8000, which underscores the meaninglessness of the benefits.

I don't remember if this has come up or not but I think in our shop we would tell the owner that if s/he wants to keep things clean, we need to at least partially vest these people in order for the current year allocation to "count" and to avoid potential trouble with the termination, we need to 100% vest them.  If we are literally talking about $800 (even if X2) it shouldn't be a problem.