Can I make this amendment effective 1/1/17?

We have a 401(k) with matching.  Participants must work for 18 months before being eligible for matching, and vesting is immediate.

For testing purposes, we want to allow non-HCEs to be immediately eligible in their first 18 months with 3 year cliff vesting and we want to make this effective as of 1/1/17.  Can we do this?

It seems to meet three standards:
1) It cannot be a cut-back   
2) It cannot be discriminatory
3) It is executed by December 31st (17)

Normally, I would say yes. 

I wouldn't dare to answer without know what else is going on.  

Typically, everyone is going to be an NHCE on their date of hire unless they are an owner (either directly or through attribution).  So, you have a plan that allows immediate eligibility for match where it previously had an 18 month requirement.  

The prospective vesting schedule for matching contributions will be a 3 year cliff (where all match that is currently there is 100% vested).  One point of contention may be employees who were already there a year (but less than 18 months) and forced to wait.  Regardless of any amendment, they would seem to be entitled to 100% vesting (because they have already waited longer than a year for eligibility).  

Just illustrating how I would go about determining how to get from where you are (18 month eligibility with 100% vested) to where you want to be (Immediate Eligibility with 3 year cliff vesting).   It may require a little more detail to show no adverse impact.

Good Luck!
 

Thank you for the response -- very good point on those 12-18 month NHCEs. 

I'm worried that there is going to be a discriminatory issue if NHCEs are subject to a 3 year cliff and HCEs get immediate vesting, even though HCEs are required to wait 18 months to be eligible for match and NHCEs get match immediately.

For example if an HCE and NHCE have both been in the plan for 2 years, the NHCE has 2 years worth of match compared to the HCEs 6 months of match, but if they both quit, the HCE gets his match and the NHCE does not.  

I'm also a bit worried that NHCEs haven't been given a reasonable opportunity to get their match for this year.  Those NHCEs may have contributed more this year had they known the amounts would have been matched, so I think we would have to give extra matching to NHCEs above just basing match on their contributions, but I'm not sure exactly how to calculate this. 

Any thoughts?

Who is going to be an HCE? When you have immediate eligibility, then the only possible way an individual would wait 18 months to enter would be if they are an owner.

Also remember, everything that is legal isn’t administratively feasible. What, exactly, are you trying to accomplish?

I'm not following.  The NHCEs would get immediate eligibility (retroactive to beginning of 2017) for match and 3 year cliff vesting.

The HCEs would continue under the current design (which is 18 months for eligibility and immediate vesting).  Of course those NHCEs that are already eligible for match will continue to have immediate vesting (as well as any of those who had to wait 12+ months already).

The goal is to get more NHCEs receiving match this year so that we can pass coverage testing.

Assuming this is administratively feasible, would it be legal?

I'm curious how one would be affected if they become an HCE within the 18-month period. Non-HCEs are eligible immediately, but 12 months later they could become an HCE and thusly ineligible for the Match. Would the document have to address this?

44 minutes ago, ERISA-Bubs said:

The goal is to get more NHCEs receiving match this year so that we can pass coverage testing.

 

So, you're failing 410(b) on the match?  Why not remove the accrual requirements for receiving the match and leave eligibility as it is?   I'm assuming you have a last day or hours requirement for the match; correct?  If not, then how are you failing 410(b)?

Well, this is a bit more complicated -- we are failing to "gateway test" for the employer to be a QSLOB (a modified version of the 410(b) test) because this plan is very heavy on HCEs compared to the control group.  If we can get all the NHCEs receiving match, it will not longer be a problem.

My concerns are:

1) Can NHCEs have 3 year cliff and HCEs have immediate vesting (even though NHCEs are eligible sooner, this seems like a problem)?

2) Since the amendment is retroactive to 1/1/17, do we need to do a corrective contribution since some NHCEs may have contributed more if they knew there was a match?

3) Can we "split the baby" and make NHCEs immediately eligible with 3 year cliff, and after 18 months vesting goes to immediate?

3 minutes ago, ERISA-Bubs said:

My concerns are:

1) Can NHCEs have 3 year cliff and HCEs have immediate vesting (even though NHCEs are eligible sooner, this seems like a problem)?

 

This is one of my concerns too.  You could have 2 participants (One HCE and the other NHCE) each with 2 years vesting service.  HCE is 100% vested, NHCE is 0% vested.  I think that is what OP was getting at.

2 hours ago, ERISA-Bubs said:

For example if an HCE and NHCE have both been in the plan for 2 years, the NHCE has 2 years worth of match compared to the HCEs 6 months of match, but if they both quit, the HCE gets his match and the NHCE does not.  

 

Mike

2 hours ago, ERISA-Bubs said:

For example if an HCE and NHCE have both been in the plan for 2 years, the NHCE has 2 years worth of match compared to the HCEs 6 months of match, but if they both quit, the HCE gets his match and the NHCE does not. 

Leaving aside the question how you get HCEs and NHCEs like this- or put another way for sake of my comment assume you can get what you are saying.

You then have a problem.  All Benefits, Rights and Features (BRF) have to be non-discriminatory on their own.  So vesting has to be shown to be non-discriminatory on its own.  it doesn't matter the HCEs might have had less time to put match in.  You simply look at the fact you have a group of HCEs who have 2 YOS that are 100% vested and a group of NHCEs with 2 YOS that are 0% vested strikes me as a problem.  For testing the BRF you might be able to test all HCEs and NHCEs so it might pass the test.  I am not even sure what the non-discrimination test for this BRF would look like.  But I can not imagine an IRS or DOL agent not having a problem with this fact pattern and not raising lots of concern. 

But I agree if the fact pattern given above can happen you need to be concerned. 

I knew it was more to it.  If you have an issue with an Employer remaining a QSLOB, then why not keep vesting at 100% and merely provide a match based on immediate eligibility.  I don't necessarily buy the "had they known they may receive a match, they would've deferred"; this seems to be an issue for safe harbor plans only. This would merely be a discretionary amendment put in place by December 31st.

Good Luck!

 

If this is a pay period match, then I am not sure how you make it retroactive to 1/1/17, unless you are planning to do some sort of true up at year-end.  If it is a year-end match, then I don't see an issue with making the match change retroactive to 1/1/17.  I agree, the idea that "they might have deferred more had they known about the matching" shouldn't be an issue if you aren't safe harbor.

I also must say that this proposed plan sounds like an error(s) waiting to happen, assuming that BRF is not already a problem with the  vesting.

If an employee switches from nonHCE status to HCE status in the first 18 mos, now he is suddenly ineligible for the matching.  You'll have to monitor that each year and shut off the match for anyone who has "crossed over".  Same issue with vesting. You will have to bifurcate everyone's matching accounts to track what portion is subject to immediate vesting vs. what is subject to the 3-year cliff.  NonHCEs currently have 100% vesting in their match, and going forward they will have a 3-year cliff.  The recordkeeping system is not going to be able to track that, unless you set up a 2nd matching source for new match and apply the 3-year cliff only to that money.  Someone who switches from nonHCE to HCE will have 2 different schedules, as well.  This is going to require quite a bit of manual intervention.  Of course, vesting only really becomes an issue when you pay someone out, I suppose, but I would be inclined to just leave everyone at 100% vesting, regardless of their HCE/nonHCE status. 

For your coverage testing, aren't you using the otherwise excludable rule?  That would eliminate anyone with less than 12 months service from the testing.  So if that is the case, I can't see that bringing people into the testing 6 months sooner would have that much impact (?) 

No one has mentioned the rules of code section 411(a)(10) regarding amendments to vesting schedules.  The amendment could not apply to any participant with 3 or more years of service unless they elect it.  That means as to both current and future accrued benefits.

43 minutes ago, Linda Wilkins said:

No one has mentioned the rules of code section 411(a)(10) regarding amendments to vesting schedules.  The amendment could not apply to any participant with 3 or more years of service unless they elect it.  That means as to both current and future accrued benefits.

Yes, but in the proposed change, is it possible for anyone to have 3 or more years of service as of the date of the amendment without being 100% vested anyway? 

It is my understanding that one only need make the offer to elect to stay with the old vesting to people who already have 3 years of vesting service.  People who don't already have 3 years would never have the opportunity to make the election.