Immediate Vesting - BRF Issue?

[Vlad401k]

We have a plan that has a 2-20 vesting schedule.

They would like to make everyone who was employed as of 12/31/2025 100% vested. Anyone who terminated before 12/31/2025 or hired after 12/31/2025 would be subject to the 2-20 vesting schedule.

To me, this sounds like a potential Benefits, Rights, and Features (BRF) issue. Is that correct?

If so, how would we determine if this amendment is discriminatory. Would we apply 410(b) Coverage Testing to the benefiting and non-benefiting group and determine if the NHCE to HCE ratio is at least 70% or is there another way? If coverage testing would apply, would we include all participants in the denominator (for example, would the denominator include employees who already met the 100% vesting requirement because they have 6 years of service?).

Thanks!

[justanotheradmin]

I agree it might be a BRF issue since often HCE have lower turnover than NHCE, though it varies by company size and industry. 

Instead of tying it to a date as you describe - how about making all accruals for plan years 12/31/2025 and prior 100% vested, and all future accruals subject to vesting. 
It will mean that some shorter service folks may have newer employer dollars that are only partially vested, but that is allowed and not a BRF issue. 

If it is a smaller plan - and not too cumbersome to do the analysis - how many people would be impacted doing it the way I describe versus your proposed method? Are there a lot of people who would be less than 100% vested if the vesting schedule is tied to year of accrual, that the sponsor DOES want to be 100% vested? Are those people NHCE? can you make them 100% vested some other way? 
If the actual impact is the same - then go with my method - which does not have a BRF issue. 
 

[austin3515]

I feel like it is a pretty normal thing to grandfther everyone in at 100% vesting and then add a vesting schedule for new hires.  you can;t amend the old vesting schedule due to cutback rules. Could you forever be required to have immediate vesting (for example if all current employees are HCE's)?  That hardly seems fair. 

Not saying it's not a BRF only that I've never heard of that as an issue for adding a vesting schedule prospectively to new participants.  I've only ever heard of a problem going in the other direction (Cutbacks).

[John Feldt ERPA CPC QPA]

If the plan preserves the 100% schedule for all participant at the top me of the amendment, and if all the HCEs have six years of vesting service anyway, perhaps you can argue the change from immediate vesting to a six year schedule results in no discrimination when comparing employees with the same number of years of vesting service?

[austin3515]

John made me think of a scenario that could stink to high heaven.  Owners and family are only employees on 7/1/2026.  They are about to hire 10 more employees because they bought another location or something. They amend the plan to add a vesting schedule for everyone eligible on 7/1/2026.  OK that would be a problem.   I don't think that is normal though, usually there's a one or two HCE's per 20 people or so, and if you did the amendment on that date, as of that date this is a broadly available benefit, and to me you are covered.

Again in all my years no one has ever suggested that different vesting schedules is something that has to be BRF tested in a way that the results deteriorate as time goes by.