Hours required for Vesting Year of Service

My client would like to change hours required for a vesting year of service from 1000 to 250.  They would like to apply it to prior years of service for any active employee.  I tend to think if I change the definition as of current date, past years would require 1000 hours, which doesn't satisfy their intention. 

I believe they would be open to applying the new vesting year of service definition to all employees with benefits still in the plan (including those who terminated prior to the amendment).  

Retroactively changing the hours of service requirement would involve recalculating distributions and is not a good option as this is a large plan.

My colleague thinks this is possible through language in the Board Resolution for the amendment or the Preamble to the amendment.  Stating that this would apply to anyone with a benefit remaining in the plan (or possibly any active employee with a benefit remaining in the plan).

Do you think this is correct?

I believe it is something that can be done. I think you need to test it as a BRF. That said, I think it would take a strange set of facts for this amendment to fail BRF in a large plan because I would think that most of the folks who are getting additional years of service for vesting hours between 250 - 999 would in most cases be non-highly compensated employees.

I'm sure there are some fact patterns where such an amendment would be discriminatory but I think in most cases it would pass muster. But I think you'd have to run the numbers and look at the demographics.

I don't think the problem would be with the current ee's.  Would you have to take into consideration anyone who took distributions (how far back?) who would have be more vested for BRF?

There are very few HCE's in this plan; it is a large non-profit organization. 700 employees, lenient eligibility so 650 ish eligible, 2-3 HCE's each year. Vesting is on a 6 year schedule, Low turnover in HCE group but in the last 6 years there has been one HCE paid out. He had 1000 hours for more than 6 years.  All current HCE's have satisfied 1000 hours >6 years.  Does that help?

Wouldn't this be the same situation back when we had to change from 7-year graded to 6-year graded.  The amendment could, at that time, apply the new vesting schedule to only participants who worked 1 hour of service after the effective date of the amendment.

Pardon the skepticism.  This change is pretty unusual, and unlikely to be discriminatory (best guess).  However, is the ER trying to accomplish something in particular.  (That is: what is the goal, then let's see how we can get there.)

I hear you and I appreciate the question!

They have some employees that have been there and participated for many years but are zero percent vested because they never have worked 1000 hours.   Some will be set to retire or their jobs will be closed soon and they want to make the change prior to this happening.  It will not be enough employees with jobs closed to even come close to a partial termination.  We are talking about only a handful of employees.  That being said, they want to effect the entire plan going forward and they would rather not make something up to these "right now" employees outside of the plan.

I thought about changing their vesting year of service definition to "elapsed time," but still I think going back is the same issue.

Edited to add this is a 401K with regular match. the eligibility is 6 months, no hour requirement, so that is why the low hour employees enter the plan. No hourly requirement to receive a match.

Can you do an amendment giving just the affected folks 100% vesting currently?

I"m not sure.

What you want to do is allowable and can be accomplished on virtually any document.  As the slogan says: just do it.

I second BG5150's suggestion. Make sure you run through the applicable nondiscrimination rules in 1.401(a)(4)-5.

8 hours ago, BG5150 said:

Can you do an amendment giving just the affected folks 100% vesting currently?

Not what is wanted.  If the plan sponsor has a reason for the 250 hour threshold why not put it in the plan and be done with it?

37 minutes ago, Mike Preston said:

Not what is wanted.  If the plan sponsor has a reason for the 250 hour threshold why not put it in the plan and be done with it?

yes! going forward with putting this in and the plan is to add language in the resolution stating that it applies to anyone with a benefit in the plan as of X date.  It will not create any increase in vesting for an HCE.

52 minutes ago, Mike Preston said:

Not what is wanted.  If the plan sponsor has a reason for the 250 hour threshold why not put it in the plan and be done with it?

Mike, I think what BG5150 and I were suggesting is that you make your change to 250 hrs for everyone going forward, and then for anyone currently employed who would have higher vesting under that standard, if it walked back, just amend the plan to say they are 100% vested. You could even figure out what their vesting would be under the 250 hour standard for prior years, classify them by percentage, and amend the plan to provide for 40%, 60%, whatever their vested percentage would be, group by group.

It would be much better if it said that it applies to anybody with an hour of service after such and such date. 

1 minute ago, Mike Preston said:

It would be much better if it said that it applies to anybody with an hour of service after such and such date. 

Depends. What you suggest, Mike, is more straightforward and easier to state, and possibly the only feasible way to do it with a preapproved document. If individually designed and large plan, classifying folks and then amending plan to give them higher vested percentages in line with what they would have if new rule walked back would be more forgiving administratively.

5 minutes ago, Luke Bailey said:

Mike, I think what BG5150 and I were suggesting is that you make your change to 250 hrs for everyone going forward, and then for anyone currently employed who would have higher vesting under that standard, if it walked back, just amend the plan to say they are 100% vested. You could even figure out what their vesting would be under the 250 hour standard for prior years, classify them by percentage, and amend the plan to provide for 40%, 60%, whatever their vested percentage would be, group by group.

I think we're on the same page. I don't hear anything clamoring for any walk back. 

1 minute ago, Mike Preston said:

I think we're on the same page. I don't hear anything clamoring for any walk back. 

Agreed.