Fully Vest Termed EEs Non-vested Bals?

[Guest cole stevenson]

We have acquired (thru a recent merger) a small legacy 401(k) plan with about 100 balances. Almost all are associated with terminated employees. For this reason we want to terminate the plan.

Under this plan's rules, the nonvested portion of participant balances are forfeited *only* at the time participant takes a distribution. So, we have a handful (maybe 20) of non- or partially-vested participants who terminated employment anywhere from one to seven years ago and have plan balances which still reflect employee and *all* employer money. (They voluntarily elected to leave their money in the plan.)

Question: Upon plan termination, are we required to fully vest the non-vested portion of these balances?

Thanks in advance for anyone's two cents worth.

Cole Stevenson

[pjkoehler]

Generally, if the plan is terminated before a (noncashed out) terminated participant incurs the fifth consecutive one-year break in service, he must be fully vested in his entire employer contributions account. The plan could, of course, provide less stringent terms, but this rule follows the basic limitation on forfeitures set forth in Code Sec. 411(a)(6)©. Treas. Reg. Sec. 1.411(a)-7(d)(4)(iv).

[R. Butler]

The partially vested people will likely have to be 100% vested...In regards to employees who terminate with 0% vesting, does the document indicate that there is a deemed distribution at termination? If so they probably should have forfeited when they terminated. If a participant forfeits prior to plan termination I would not make them 100% vested.

[Guest cole stevenson]

Yes. The document does contain immediate deemed-distribution language pertaining to participants who are zero percent vested at termination of employment. But this plan had a graded schedule, so I assume this solely applies to those who never achieved the first vesting tier. All others may need to be fully vested at plan termination.

As noted in the original post, the document provides that all other forfeitures occur at the time participants take a "complete distribution of the vested portion of his Account."

So, considering these two provisions together along with the "five consective 1-year breaks" rule, it appears the group I need to fully vest the participants who were partially-vested - just as R. Butler indicated in his post.

Any follow-up thoughts?

Cole