Vesting

Hypothetical question which may turn out to be real - don't know yet if it is 401k plan or ERISA 403(b), but I don't think it matters.

Say you have employer A, whose plan has a (pick it - let's say 4 year graded) vesting schedule for matching contributions. (Not a safe harbor plan, by the way.)

Let's say that employer A is going to be involved in starting up a new business, that for now at least would NOT be a controlled group.

The new business B will have a bunch of employer A's employees transferred to them.

Is there a reasonable way to have A's employees who transfer to B, have their vesting in A's plan continue to increase at the normal rate, based on the service with B? Something like: for vesting purposes only, former employees of A who transfer to Employer B will have their years of service with B apply to their account balances in this plan.  Or something along those lines.

I've never seen this done, but curious if it can be done.

I don't know. I haven't seen it done like you are describing either. I've seen past service with A granted for B in cases where B has either a spinoff form A or a newly established plan that covers the employees from A who go to B. I have not seen a case where A continues to granst future service for folks leave A for B based on service with B.

Yes, that can be done and I've experienced personally. 

We were part of A, and a group was spun off and sold to B. We were terminated and eligible for distributions from A but would forfeit non-vested balances if we did so immediately. However, our future service with B was credited for vesting with A (an amendment was needed I'm sure) and once we attained full vesting of benefit from A, could withdraw entire amount.

Could B adopt the plan?

There are fairly extensive rules under 1.401(a)(4)-11(d)(3) regarding "imputed service" (i.e., service credit while not actually performing services for an employer maintaining the plan) that lay out when crediting imputed service is nondiscriminatory and in what situations it's permissible. As long as you meet those requirements, it should be fine.

Interesting. Thanks!

On ‎10‎/‎6‎/‎2020 at 2:34 PM, EBECatty said:

There are fairly extensive rules under 1.401(a)(4)-11(d)(3) regarding "imputed service" (i.e., service credit while not actually performing services for an employer maintaining the plan) that lay out when crediting imputed service is nondiscriminatory and in what situations it's permissible. As long as you meet those requirements, it should be fine.

And if you review them you will see they are very liberal. Basically, unless the only group that benefits is almost exclusively HCEs, you should not have a problem.

Yes, unless the effect is to somehow benefit HCEs in violation of 401(a)(4).