SRF + Vesting

I am trying to understand which event triggers taxation - vesting or when the SRF lapses. For instance, if the document states a participant is 0% vested until attainment of Normal Retirement Age (age 65 in the document) and also that the participant will forfeit 100% of the account if no longer employed on 1/1/2026, when is the participant taxed if the participant is age 52 as of 1/1/2026 and still employed as of 1/1/2026. On the one hand, I think he's taxed because the SRF lapsed on 1/1/2026; on the other, he isn't vested in the funds yet because he hasn't attained NRA (but he will no longer lose the right to the funds, since the SRF lapsed. He's merely got to wait until he reaches age 65).

Note, I did not write this document.

A person is considered vested when the substantial risk of forfeiture lapses. The fact that the document says that they are 0% vested is not relevant if in fact they are vested (because they'd be entitled to the money even if they performed no more service).

Thanks, Carol. Basically when the SRF lapses, a participant becomes 100% vested, regardless of what any vesting schedule in the plan states. Similar to how a participant becomes fully vested upon reaching NRA in a qualified 401(k) plan. Do I have that right? This really clears up a lot for me - thanks!

It sounds like the document may be drafted confusingly, but generally if there is more than one vesting condition (i.e., more than one condition that creates a substantial risk of forfeiture), you would need to satisfy all vesting conditions. The wrinkle here seems to be that both vesting conditions are different dates. The 1/1/26 date does not seem to do anything - for example, if you're employed on 1/1/26 when you're 52, but quit on 1/1/27 when you're 53, you would still forfeit the entire account because you didn't work until age 65. So working until 1/1/26 doesn't vest you in anything. If those are accurate plan terms, I'd go with the later of the two dates. 

Something you should never see in a 457f plan for example is:  Contributions wil become vested based on the 6 year graded.  But a participant will forfeit everything if they leave before 10 years of service.  

If your document has wording that even approaches that, then it makes no sense...  Not sure if you copy and paste text so we can see what you mean but that might be helpful.

Thanks Austin and EBE. The test reads as follows. I'd appreciate any thoughts you have on when the participant vests and is therefore taxed. Given how the document is written, I am thinking legal counsel may be needed to decipher the document...

Nonelective Contributions: Your interest in your Non-elective Contribution Account will vest based on your years of vesting service (defined below) in accordance with the following schedule: 0% vested until Normal Retirement Age.

Special Forfeiture Rules: Notwithstanding the forgoing, you will forfeit 100% even if such portion of your account was fully vested upon the occurrence of the following events: Termination of employment prior to January 1, 2026.

I think the "special forfeiture rules" were probably intended to capture events like a for-cause termination. Based on that snippet alone, I would say vesting does not occur until "Normal Retirement Age." 

I have deciphered the text!!  The first paragraph just blanket says you're 100% vested at normal retirement age with NO service requirement.  The 2nd paragraph says, the first paragraph does not apply if you leave before January 1, 2026. The two combined is the vesting requirement.  I'm willing to bet the NRA in the Plan is 1/1/2026.  so for example, January 1st following the year in which you turn 65. and the participant turns 65 in 2025.  The vesting on January 1st is only to make sure its a 2026 taxable event since the participant will have theoretically retired and have no more income.

I saw the same approach to vesting once before.  It's classic legal non-sense designed so that you have to pay someone $500 an hour to tell you what it means.  If there is another purpose it beats me.

18 minutes ago, austin3515 said:

I have deciphered the text!!  The first paragraph just blanket says you're 100% vested at normal retirement age with NO service requirement.  The 2nd paragraph says, the first paragraph does not apply if you leave before January 1, 2026. The two combined is the vesting requirement.  I'm willing to bet the NRA in the Plan is 1/1/2026.  so for example, January 1st following the year in which you turn 65. and the participant turns 65 in 2025.  The vesting on January 1st is only to make sure its a 2026 taxable event since the participant will have theoretically retired and have no more income.

I saw the same approach to vesting once before.  It's classic legal non-sense designed so that you have to pay someone $500 an hour to tell you what it means.  If there is another purpose it beats me.

The OP says NRA in the plan document is age 65, while the participant will only be 52 on 1/1/26. 

1 hour ago, #toomanyrules said:

Special Forfeiture Rules: Notwithstanding the forgoing, you will forfeit 100% even if such portion of your account was fully vested upon the occurrence of the following events: Termination of employment prior to January 1, 2026.

Then I guess this is meaningless and I agree vestng at NRA.  Only because I have seen it many times before, I assume they copied a document from another client and forgot that language was in there.  It's totally irrelevant.