Payout of Terminated and now Deceased Participant

A client had an employee who was not paid out for a couple of years (she kept him in the plan thinking maybe some work would come up and he would be back in).  Over the summer the employee died.  The plan states that vesting does not count if someone dies or becomes disabled.  The employee died and had a break in service prior to their death.  

Is the deceased terminated employee 100% vested?
Or do I pay him out based on his vested % at the time he terminated?

Thanks

Was the employee's vested account balance at the time they last performed services for the employer less than $5,000, and does the plan contain a provision requiring the involuntary distribution of vested account balances of less than $5,000 upon termination?

Did the employee have 5 consecutive 1-year breaks in service after the time they last performed services for the employer and before they died?

If the answer to both of these questions is no, then I think it's clear that the account should become 100% vested upon the employee's death.

If the answer to either question is yes, then a forfeiture may have occurred upon the employee's separation from service, or after 5 consecutive 1-year breaks in service.

However, if the dollar amounts involved are not large, and the employer is concerned that the issue may not be entirely clear and wishes to avoid a potential dispute with the employee's beneficiary, the employer might choose to explicitly grant the additional vesting and pay out the full account balance.

Terminated 2  years ago

Balance is in excess of $5,000 (30K)

So he needs to be 100% vested.  Thanks

1 hour ago, Basically said:

A client had an employee who was not paid out for a couple of years (she kept him in the plan thinking maybe some work would come up and he would be back in).  Over the summer the employee died.  The plan states that vesting does not count if someone dies or becomes disabled.  The employee died and had a break in service prior to their death.  

Is the deceased terminated employee 100% vested?
Or do I pay him out based on his vested % at the time he terminated?

Thanks

I think the question that needs to be asked is:  was this person terminated?  If they were why weren't they offered distribution paperwork before now (assuming the plan document would say they can make a distribution shorty after termination)?  If they though they could come back were the still employed but just not working?

Once this non-plan question is settled you have an easy answer- follow the plan.  If they were terminated years ago they don't get the 100% vesting because of death.  If they weren't terminated years ago but terminated due to death they are 100% vested. 

So I don't think the most important issue here is one the plan's document or retirement rules can answer  I think it is a facts and employment law question.  When did this person terminate?  Answer that question and you get the right result.  

I'm sure the business owner will like that answer better.  The nature of the business is such that depending on possible future jobs they will need skilled employees to perform the very specialized work.  I think she was being nice allowing him to keep his plan balance in the plan.  Now that I think of it, to keep a plan clean there really is no place for just being nice.  You need to follow the doc and if they have to go , they have to go.

42 minutes ago, Basically said:

I think she was being nice allowing him to keep his plan balance in the plan. 

Sounds more like she decided to keep his balance in the plan and not even offer a distribution. If the employee terminated then that's the opposite of being nice. Also, with a balance >$5k, it was HIS choice to make to keep balance in or take it out.

As ESOP Guy hit the nail on the head, the question is a facts and circumstances "was there a termination of employment?" How was it recorded in payroll, was the person offered COBRA, were any other termination of employment benefits offered?

If the facts and circumstances and plan provisions steer to not fully vesting but the employer wants to do so, the plan can always be amended to provide such assuming this was not a highly compensated employer.

I recall an IRS audit from years ago in which the aditor made my client's plan vest participants who had balaces in the plan including those who died as well as all others when the plan terminated. The auditor's position was that if the money hadn't been distributed, all the vesting rules applied. 

I get that there is no plan terminatin here, but that auditor from days of yore would say if you diddn't distribute, you must vest.

I would be interested in CuseFan, ESOPGuy, or anyone else's take on this.

The plan may need to VCP/SCP itss failure to distribute.

16 hours ago, Ebplans said:

I recall an IRS audit from years ago in which the aditor made my client's plan vest participants who had balaces in the plan including those who died as well as all others when the plan terminated. The auditor's position was that if the money hadn't been distributed, all the vesting rules applied. 

I get that there is no plan terminatin here, but that auditor from days of yore would say if you diddn't distribute, you must vest.

I would be interested in CuseFan, ESOPGuy, or anyone else's take on this.

The plan may need to VCP/SCP itss failure to distribute.

The fact there was a plan termination is pretty important.  There is a law that says you fully vest upon termination of the plan.  I just had this earlier this year.  An ESOP said you didn't forfeit until a person had 5 breaks in service.    They had a cliff vesting schedule.   We had to vest all those 0% people upon termination but that is what the law says.

I don't see that rule/precedent being very applicable here.  

agree