Are terminated parts. 100% vested upon plan termination.

[Guest Don J. Smith]

ER Sells his company, thus terminates his 401k and everyone becomes 100%. Q.> What about participants that have been terminated for 2 or 3 years that were not fully vested at the time they terminated? Don't they have to forfeit their unvetsed balance to the others that stayed until the ER sold the company? This is a standardized prototype document.

[R. Butler]

A partially vested participant who terminates service, is not paid the vested accrued benefit, and does not incur a one year break in service prior to the date of termination must become 100% vested upon termination of the plan. Some IRS district offices interpret this rule to require that terminated participants that have not been paid out and have incurred breaks in service of less than 5 years be fully vested.

The documents we deal with all state that forfeiture occur upon the earlier of payout or five consecutive breaks in service. For that reason we have taken the positon that terminated participants with a balance and less than than 5 consecutive breaks in service do become 100% vested upon plan termination. The plan termination itself does not trigger a forfeiture.

[John A]

This is a troublesome question to me, but the general IRS opinion I have encountered recently has been:

If the terminated participant had a forfeiture (either due to receiving a distribution or having 5 1-year breaks), the terminated participant did not have to be made 100% vested.

If the terminated participant had not incurred a forfeiture, the terminated participant did have to be made 100% vested.

I believe there is also a court case in which the plan sponsor successfully argued that terminated particpants did not have to be made 100% vested because the business was shut down and so the participants would have had no opportunity to earn additional vesting service by rehire. If I remember correctly, the IRS only accepts this argument for the area of jurisdiction of the particular court, and not for anywhere else in the country. I don't think this argument works where a business is sold rather than shut down.

Perhaps others can fill in details and chime in with their opinions. I'd like to know what the experience of others has been in answering this question.