Vesting at Normal Retirement Age

Hoping someone can provide me a quick sanity check.

Plan uses regular NRA definition of later of age 65 or fifth anniversary of plan participation. 

Participant becomes eligible for the plan on 1/1/23, when they are age 63. They quit on 1/1/24, when they are 64, and are 20% vested. Unvested balances are forfeited after five breaks in service. They do not take a distribution. On 1/1/28, when they are age 68 and have four breaks in service, they reach their fifth anniversary of plan participation. 

Are they fully vested? In other words, does reaching NRA after termination restore the pending forfeitures?

I don't recall that reaching NRA after separation of service triggers full vesting. I'm almost certain that you have to reach NRA while employed to get 100% vesting.  Unless some thing else unusual would trigger full vesting like partial or full plan termination.

The Master Tex I use specifically states - that benefits shall be come nonforfeitable (if the Participant is employed on or after attainment of NRA).

So you might want to check the document, it may be address in there.

Thanks. Everything in me says "no" but I can't quite put my finger on why that's the answer. Plan document just says full vesting at Normal Retirement Age. 

Typically the participation part of the age plus participation vesting provision refers to active participation and not the mere passage of time.  Active participation is based on plan years in which the individual had a contribution or forfeiture reallocation to their account.  If the individual was terminated, then there would be no additional years of participation.

That being said, if the plan document says explicitly that vesting occurs at the later of age 65 or the fifth anniversary of plan participation, and the meaning of "plan participation" is not defined, then it is up to the Plan Administrator to decide how the rule applies.

Thanks Paul. This has been my experience too, but like I said I can't find a satisfying answer yet as to why. Client's issue has been resolved, so it's more curiosity on my part at this point.

Section 411(a) does not have any reference to "active" participation. Neither does the definition in 411(a)(8), which speaks only to the "fifth anniversary of the time a plan participant commenced participation in the plan." In my case, the participant still has an undistributed (and vested) balance, which I think still makes them a plan participant, so I don't see anything with Section 411 that stops the five-year clock from running. 

For a few reference points, the FIS Relius pre-approved document doesn't draw any distinction in NRA regarding active participation.

The ERISApedia Qualified Plan book confirms the NRA rule is based on passage of time (not years of vesting service), which is not quite on point.

Other resources mention an "active" requirement to attain NRA, but the only citation is to 411(a) and 411(a)(8), which I don't read as imposing an active service requirement.

Perhaps there's a cross-reference or other rule that governs the outcome that's outside of Section 411.

In any event, would be interested in anyone has more insight here. 

I don't know the authority but it is generally understood when you use this it is the fifth anniversary of the time the plan participant commenced participation in the plan if employed at that time.

I would like to see the exact language of your plan defining "vesting".

In the attached FAQ from the DOL it says: "In a defined contribution plan such as a 401(k) plan, you are always 100 percent vested in your own contributions to a plan, and in any subsequent earnings from your contributions. However, in most defined contribution plans you may have to work several years before you are vested in the employer's matching contributions. (There are exceptions, such as the SIMPLE 401(k) and the safe harbor 401(k), in which you are immediately vested in all required employer contributions. You also vest immediately in the SIMPLE IRA and the SEP.)"

I have never seen a Plan Document that did not defined vesting in terms of "service", or that participating in the underlying Plan without more accrued time toward vesting. 

BTW:  Note that "participant" is a noun and "participate" is a verb. So must a participant participate to accrue vested service? 

The DoL works in mysterious ways. 

David

FAQ from DoL - Vesting.docx

This may be another way to look at it.  If vesting were to get bumped up to 100% upon the attainment of NRA while not being employed, why would a partially vested terminated participant ever take a distribution before they attain their NRA?  Everyone would wait after they terminate until their NRA to get paid so that their benefits can become fully vested, resulting in a sometimes very significant increase; in your example, the benefit would automatically quintuple on 1/1/28 even though the participant terminated years earlier - that can't be right.

Thanks for the thoughts, all. For what it's worth, I completely agree. This is how I've always understood and implemented it, but just never had a reason to look at the underlying statute for the source of that rule.

About Connor’s observation:

Under the Treasury’s interpretation (which under the 1978 Reorganization Plan also is persuasive authority to interpret ERISA § 203(a), except for § 203(a)(3)(B)):

“[Y]ears which may be disregarded under [Internal Revenue Code §] 410(a)(5)(D) may be disregarded in determining when participation commenced [to determine the applicable “anniversary of the date the plan participant commences participation in the plan”].” 26 C.F.R. § 1.411(a)-7(b)(1)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.411(a)-7#p-1.411(a)-7(b)(1)(ii).

EBECatty:

IF one treats the Treasury’s rule as a persuasive interpretation of the statute or the plan, might specifying something a plan may disregard mean that a period not meeting that § 410(a)(5)(D) standard is not disregarded in counting the normal retirement age participation period?

(I have never considered your question and have not read the relevant law; I express no view.)

This is not advice to anyone.

I've been posed a similar question recently and the regulations do not seem to provide a clear answer. Here, NRA is the later of 65 or the fifth anniversary of participation. Someone leaves at age 66 and after her third anniversary of participation. The question is whether she becomes 100% vested upon reaching her NRA.

The only logical thing I can point to is the pre-approved (FIS) document, which defines Normal Retirement Age:  "Normal Retirement Age" means the age elected in the Adoption Agreement at which time a Participant's Account shall be nonforfeitable (if the Participant is employed by the Employer on or after that date). Logic says that the IRS would not allow this in a pre-approved document, if it were contrary to the regulations. (I apologize for using IRA and Logic in the same sentence.) I find nothing in any regulation that makes this distinction.

Presumably, this wouldn't be being asked unless the plan is using a graded vesting schedule.  My reading of the provision is that the participant is not 100% vested.  In the example, this person's Normal Retirement Age is the 5th anniversary of participation because it is the later of the two... i.e., it is later than her attaining age 65.  If she has not attained the 5th anniversary prior to her termination of employment, she would not be 100% vested (though she may be partially vested under the normal vesting schedule).

I don't see the issue if you are quoting the adoption agreement for the plan at issue and the basic plan document that is to be used in connection with that adoption agreement.   You follow plan terms.  If you are quoting just some basic plan document that is not being used in connection with the adoption agreement for the plan at issue, I still believe that is the way that everyone I know would interpret the language.  If you must have specific IRS authority for this conclusion, I don't think you will find it.  (I will check back in hopes that you do.)

The question is whether one can wait until NRA to get a step-up in vesting. The Basic Pre-Approved Document (relevant to this question) says must be employed at the time of reaching NRA. The regs only refer to a participant reaching NRA to become 100% vested. In my almost 50 years of dealing with this, I never understood that employment was a predicate. Now it seems that view was mistaken.

20 hours ago, Dalai Pookah said:

"Normal Retirement Age" means the age elected in the Adoption Agreement at which time a Participant's Account shall be nonforfeitable (if the Participant is employed by the Employer on or after that date).

We use Relius Docs too, and this is what it says in the BPD.

@EBECatty did you look in your BPD?  If you cannot find it, I would put in a ticket with the document provider.

Again, I don't think you will find authority on this but in my less than 50 years (30 years) of dealing with this a person is terminated prior to reaching NRA as defined by the plan, they would not be able to age into the vesting (unless they came back within a year and could bridge service time).

7 minutes ago, BG5150 said:

We use Relius Docs too, and this is what it says in the BPD.

@EBECatty did you look in your BPD?  If you cannot find it, I would put in a ticket with the document provider.

No, you're right, I ended up finding that in a different section a little later. Thanks. I'm not sure that solves the underlying question about the basis in the statute/regulations, but it is there in our pre-approved document. 

Rev. Rul. 84-69 (emphasis added):

Quote

Thus, for a plan to satisfy the requirements of section 411, an employee participating in the plan at normal retirement age must have a nonforfeitable right to 100 percent of the employee's accrued benefit irrespective of whether some portion of such accrued benefit would otherwise be forfeitable under the plan's vesting schedule. See Caterpillar Tractor Co. v. Commissioner, 72 T.C. 1088 (1979).