Elimination of 401(k) match and vesting

[Guest benefitsanalyst]

If an employer decided to eliminate their 401(k) match, what impact does this have on vesting? Would it trigger vesting so that you would have to immediately vest everyone currently in the plan?

How about if you were to reduce the match, would that trigger vesting?

[Bill Berke]

You can amend or eliminate match. It is not a protected benefit. You vest up only if the contributions to the plan are curtailed (the old "substantial and recurring" reg). However, if the only contribution to the plan was the match, then there could be an argument that employer contributions have been curtailed. On the other hand, employee contributions are deemed employer contributions and the law does not distinguish between types and sources of employer contributions. And we have not vested up anyone for this. But all the times we have eliminated a match there was a continuing employer contribution to the profit-sharing side of the plan. As long as there are "substantial and recurring" profit sharing contributions, I am very comfortable not vesting up match accounts upon elimination.

[MWeddell]

Because the elective deferrals officially are considered to be employer contributions for IRS purposes, there is NOT a complete cessation of employer contributions that would trigger full vesting.

[Guest Bill MM]

I had a situation where the plan document mandated that participants would become fully vested in the event that the match was eliminated.

I have a question: What types of communication do you use to the participant population regarding the elimination of a match? How much of an advance notice is normally given?

[KJohnson]

The IRS confirmed MWeddell's understanding at the 1998 ASPA conference (Q&A 53).

[Guest Bill MM]

Thanks. Are you saying this would apply to an individually designed document which mandated vesting would be 100% in the event that the match is eliminated?

Can you give me your experience with communication?

[KJohnson]

BILL MM,

I THINK THAT WITH YOUR PLAN PROVISIONS YOU WOULD HAVE PROBLEMS NOT PROVIDING 100% VESTING.

FROM A QUALIFICATION AND FIDUCIARY STANDPOINT YOU MUST ABIDE BY YOUR DOCUMENT. EVEN IF YOU FIRST AMENDED YOUR PLAN TO DELETE THE VESTING PROVISION AND THEN ELIMINATED THE MATCH, I THINK YOU WOULD STILL HAVE PROBLEMS. ELIMINATION OF THE VESTING PROVISION WOULD APPEAR TO BE A CHANGE IN VESTING SCHEDULE WITH THE ATTENDANT PARTICIPANT OPTION TO ELECT THE OLD SCHEDULE. (I HAVE NOT GONE BACK AND LOOKED AT THE LAW AND REGS ON THIS POINT).

ALSO, EVEN THOUGH AMENDING THE PLAN IS NOT A FIDUCIARY FUNCTION, BASED ON WHAT YOU HAVE TOLD PARTICIPANTS IN THE PAST REGARDING THE VESTING OF THE MATCH, YOU MAY BE INVITING FIDUCIARY BREACH LITIGATION UNDER THE SUPREME COURT'S DECISION IN VARITY.