Vesting Service Question

[LostInPension]

I have a question about some plan language I have seen.  The plan provides 3 year cliff for matching contributions based on "Years of Participation".  Years of Participation are defined as, "Any Plan Year during which you both complete at least one thousand (1,000) Hours of Service and receive a match for at least six different months of the Plan Year."  An employee receives matching contributions for a payroll period if he/she defers at least 3% of compensation. Eligibility is date of hire and entry date is the date is based on the date you elect to defer.

I believe that minimum vesting requirements under 411 require counting all years of service for all Plan Years in which an employee earns at least 1,000 hours of service, unless the year of service is can be excluded.  The closest language I can find for this situation is Treas Reg 1.411(a)-5(b)(2), which states, "In the case of a plan utilizing computation periods, a year of service completed by an employee under a plan which requires mandatory contributions (within the meaning of section 411(c)(2)(C) and § 1.411(c)-1(c)(4)) to be made by the employee for such year, if the employee does not participate for such year solely because of his failure to make all mandatory contributions to the plan for such year. If the employee contributes any part of the mandatory contributions for the year, such year may not be excluded by reason of this subparagraph." (emphasis added) 

My reading of Treas Reg 1.411(a)-5(b)(2) is that a year of service for vesting cannot be excluded for any computation period in which some mandatory contributions (matching contributions in this case) are made (i.e., even if just for one payroll period), so that there may be an issue with requirement that an employee receive matching contributions for at least 6 months in the computation period (Plan Year in this case).

My question is, am I misreading Treas Reg 1.411(a)-5(b)(2), or is there some other guidance that permits the requirement stated by the plan?

[C. B. Zeller]

The reg section you are quoting is talking about plans that have mandatory employee contributions. Elective deferrals, by definition, can not be mandatory contributions (otherwise they wouldn't be "elective").

I don't see how the vesting provisions you described can be legal in a qualified plan. Do they have a determination letter?

[LostInPension]

Thank you.  I went straight to Treas. Reg. section 1.411(c)-1(c)(4) and thought the language fit for matching contributions without bothering to read that the section was for defined benefit plans, so that language does not fit either.  I don't know if it has a determination letter.  If it matters, the plan is part of a 2 plan setup.  Employee contributions are made to a 403(b) and matching contributions are made to a 401(a) plan. 

I was just surprised by the language and was trying to figure out whether it was permissible in any context.  I thought that all Plan Years in which an employee earned 1,000 hours had to be counted for vesting purposes.  I had never seen/heard of conditioning vesting service for matching contributions on employee contributions.  Is there some other guidance that permits it?

[david rigby]

Is this a governmental plan?

[LostInPension]

I don't think so.  It is not a state or local government, but it's related to a state government (i.e., partially funded by the state).  It's a tax exempt entity under 501(c)(3).

[Luke Bailey]

On 1/4/2021 at 1:11 PM, LostInPension said:

I don't think so.  It is not a state or local government, but it's related to a state government (i.e., partially funded by the state).  It's a tax exempt entity under 501(c)(3).

1) I am not sure that a state government could fund a plan that was not a governmental plan. Of course, there are still no regs on what is a governmental plan, so it may fall into a gray area. I would check the plan document. Also, see if the plan has filed 5500's. If not, they are likely claiming to be a governmental plan.

2) Of course, governmental plan are not subject to 411 vesting, but just "pre-ERISA" vesting rules. Having said that, I have never seen vesting provisions of the sort described in a governmental plan. You would need to research old pre-1975 rulings, or maybe also check if the plan has a DL and what it represented in the 5300 application.