Amending the hours method used to calculate vesting

[Guest Kelly Igel]

When amending and restating a plan whose prior document calculated vesting using an elapsed time method (which is not an option in our prototype), can you change the method of calculating vesting to 1,000 hours during each plan year without violating the anti-cutback rules? Is there anything special that would need to be done?

[M R Bernardin]

If this plan is subject to ERISA, which I assume it is, there are special rules in the DOL regulations that must be followed when changing service crediting methods.

[Guest STLGiant]

We're assuming from the fact that your restating to a prototype that this is an ERISA 403(b) plan. That being said, if you amend and restate to a prototype, at what period are you restating from? If it's from the start of the remedial amendment period, you have a written form vs. operation issue of calculating vesting by the terms of the new restatement using a method other than elapsed time. This may be more trouble than its worth. I'd probably seek another document that provides for elapsed time method, or restate effective as of some point in the future (post remedial amendment) whereby you can credit vesting to-date using elapsed time and amend prospectively to something other than elapsed time.

FYI, in an audit I was made aware of, the IRS audit guidelines now call for pro-rating the 1000 hour rule to 600 hours in the case of school teachers only working during the normal school year (spring and fall, excluding summer session(s)). Beware of universal availability defects!

[Guest RJT]

If this is an ERISA plan, as long as you do not reduce the amount of vesting anyone has accrued, and as long as you provide optons for those with three years of service as required under ERISA section 203, you're OK. If not an ERISA plan, the change is not a problem.

In any event, you can change your "prototype" without any concerns. 403(B) plan documents are not required by the Code and are not "qualified", therefore changing them has no tax effect. And there are no tax code imposed amendment rules, and thus no remedial amendment period to worry about.

[Guest STLGiant]

IMHO I'm not sure I agree with RJT's analysis, but then again the fact pattern is open to interpretation.

Since the deferral contributions to non-ERISA 403(b) plans are always 100% vested, it appears to us that your issue on amending a vesting calculation is due to the plan having some "other type of employer-related contributions". Having any employer-related contribution in your non-ERISA 403(b) plans "creates" an ERISA 403(b) plan. Therefore I don't agree that if "it's not an ERISA plan the change is not a problem."

If your contributions are other than employee 403(b) deferrals, your non-ERISA 403(b) plan is now subject to ERISA rules, regulations, discrimination testing, limitations, 5500 filings and DOL communications. If a plan is subject to ERISA it must follow it as if were a 401(a) plan, including having a written plan document and must be amended in-kind.

I do agree with RJT that non-ERISA plans are not subject to ERISA rules, nor must they be restated to any document, prototype or otherwise, nor have remedial amendment periods to concern themselves with.

[Guest RJT]

I've no quibble with the Title 1 document requirements, but they are nothing like the 401(a) rules. But the ERISA required amnedments have no tax effect. Not to be picky, but, remember, vesting schedules in a governmental plan or church plan will not trigger ERISA.