100% Vesting When Contributions Haven't Been Made For a Long Time

[mming]

The vesting for all existing participants in a profit sharing plan was increased to 100% because it has been many years since the last contribution was made.  The plan hasn't been terminated because the trustee is always optimistic that one day he'll be able to contribute.  My question is, must all new participants also be shown as being 100% vested, or should this happen only after they've been in the plan a few years if no contributions are made (the plan has a 2/20 vesting schedule)?  The document is silent on this.  Thanks in advance for any help.

[david rigby]

Ambiguous.  Does the first statement apply only to certain participants at a particular point in time, while all subsequent participants are subject to some other schedule?  Or is there a different interpretation to your statement/question? 

Perhaps the answer is irrelevant: any record/statement should show the accurate vesting status/percent for each participant, whether or not they are identical, even if the account balance is zero.  Of course, if account source X is 100% vested and account source Y is subject to a different schedule, the statement should also make that clear.

Now that I write that, it seems so obvious that (maybe) there is something else (unsaid) going on?

[Paul I]

@david rigby is correct to begin by saying it is ambiguous.  A participant's vesting percentage is based on the rules in the plan document.  If the plan document was amended to specify that all employees with an account balance on a specific date are 100% vested, and the preexisting rules at the time of the amendment remain in place for all other employees.

Under the preexisting rules, all participants would still accrue vesting service regardless of whether they did or did not receive a contribution., and if and when a participant is given an employer contribution, the participant's accumulated vesting service determines the participant's vested percentage.  If the plan previously was not amended, then review any documentation like committee decisions or ongoing communications to participants that would support the full vesting being applicable as of a specific time.  You may want to seek the opinion of the plan legal counsel if the documentation is sufficient to then memorialize the decision in a current plan amendment.

Carefully read the language of the plan document to determine the vesting rules currently in place.  If the language does not align with the company's expectations, then amend the plan with clear language while taking care not to reduce anyone's vesting under the current provisions.

One concept that can trip up plan sponsors is that a plan's eligibility service, vesting service, and service-related allocation conditions can each have their own set of rules, and a calculation of a participant's service at any specific point in time yield a different result for purposes of eligibility, vesting or allocation.

[bp parv]

@mming, you are referring to the IRS' "complete discontinuance" position, which as you know is a facts and circumstances analysis. If a PS has "completely discounted" PS contributions, then all participants must become 100% vested in order for the plan to maintain its tax-qualified status. The plan sponsor here has apparently made the determination that there has been a complete discontinuance. The problem, as you correctly imply, is that the "complete discontinuance" doctrine is not clear. So, for example, you ask if participants entering the plan after the complete discontinuance also become 100% vested? If you read the scant IRS guidance on this issue, the answer would be yes, although that seems like a ridiculous windfall should the plan sponsor finally decide to make a PS contribution in the next few years where under a normal vesting schedule they would only be 20% to 40% vested.  And if the plan sponsor is always intending to make a PS contribution but simply cannot, when exactly does the complete discontinuance occur? Furthermore, if the plan sponsor does begin making repeated and substantial PS contributions in the future, does that require a separate vesting schedule for those new contributions? 

My belief is that the IRS is purposely vague on this issue because they would prefer that you terminate the plan. My thinking in your case is that plan termination is a much cleaner course of action if you are expecting new employees/participants in the plan.  

 

[mming]

My apologies for the ambiguity - I am referring to the IRS' discontinuance position, as bp parv suggests.  The questions he/she raises would've been my follow-ups, so it would be interesting to hear people's experiences concerning this topic. BTW, the sponsor has high turnover, but some employees stick around over a year & become eligible, so there's always a few new particpiants every year. 

I suppose the safest route would be to give future participants full & immediate vesting, and if a contribution actually happens, reinstitute the 2/20 schedule at that point for the new & future participants.  Going forward, assume discountinuance again w/100% vesting after some years of no deposits? 

As for the timing of the discountinuance, perhaps the IRS' permanence stance can be considered, where a plan is expected to, I believe, have contributions made at least 2 out of every 5 years.  This would default the vesting to 100% after 3 years of no contributions (this plan went past 3 years, though).  I'm guessing most would agree with terminating the plan, as was mentioned, and maybe using the 3 year timeframe as a policy in the future, though I could also see dissenters thinking that may be too harsh.     

[Paul I]

Given the additional facts, the full vesting of participant accounts due to a discontinuance of contributions does not alter the plan's vesting schedule for future profit sharing contributions if there is a separate accounting for the resumed contributions. 

The prior contributions that became fully vested must remain fully vested.  If any new contributions are credited into that account, then the account with the commingled contributions are fully vested. 

If a participant does not have prior contributions that became fully vested, then the plan is not obligated to fully vest new contribution for that participant.