Switching to more restrictive vesting schedule

Client is wanting to change their vesting schedule from 100% immediate to 4 year graded (25/80/75/100).  My understanding is that Vesting is a protected benefit which cannot be reduced or eliminated. The more restrictive schedule must be applied to all future contributions received on or after the effective date of the change.....unless you make all current participants 100% immediately vested in all future contributions as well and apply the more restrictive schedule to new participants. Are there recent or newer regulations addressing this that may have a different application than the one I've described? Is this how more restrictive vesting should be applied?

Read IRC 411(a)(10).  https://www.law.cornell.edu/uscode/text/26/411

The most common method of doing this is probably to apply the new schedule only to those who become participants after the effective date.

I agree with David.   As  a practical matter I would recommend the amendment applies to anyone who enters or is hired after a given date.  I would add something like 1/1 makes it easier than say 12/20.  

I would add get it written in the amendment how rehires are going to be treated.   Easiest is to simply apply the vesting schedule that was in effect on their original hire date (date of entry).  You do NOT have to do that but it is a pretty easy way to do it.   It depends on how big the client is and how often a rehire is.   I have several clients with thousands of employees that did a change to a worse vesting schedule and they have a lot of rehiring.    This made things pretty easy to track.   But unless this is a tiny client that doesn't tend to rehire anyone the rehire question will come up.  You might as well get the amendment to spell out what happens now instead of running around trying to interpret what it means regarding rehires. 

Robin Wilson, David Rigby's and ESOP Guy's advice above is practical and may be what you want to do, but to spell out the options, you could say that everyone with 3 or more years of service is 100% existing balance and future contributions and everyone with less than 3 years is 100% vested in what they have, and under the new vesting schedule for new contributions. It's been done.

The IRS position is that one can't make a vesting schedule more restrictive for existing participants.  https://www.irs.gov/retirement-plans/change-in-plan-vesting-schedules

53 minutes ago, MWeddell said:

The IRS position is that one can't make a vesting schedule more restrictive for existing participants.  https://www.irs.gov/retirement-plans/change-in-plan-vesting-schedules

That applies to the accrued benefit.  You can make it more restrictive going forward.  You would just have to record-keep two buckets for each vestable money type.

At least that's the way I've always seen it.

5 hours ago, MWeddell said:

The IRS position is that one can't make a vesting schedule more restrictive for existing participants.  https://www.irs.gov/retirement-plans/change-in-plan-vesting-schedules

MWeddell, not exactly, and of course the issue is the law, not IRS position. The url you reference explains the law, and is consistent with my statement. This is not an issue like partial termination where there are open questions. To be more specific, and consistent with BG5150's comment, IRC sec. 411(a)(10)(A) prohibits any reduction in the vested percentage of any participant's accrued-to-date benefit, while 411(a)(1)(B) protects the vesting expectations as to future accruals only for participants with 3 or more years of service.

4 hours ago, BG5150 said:

That applies to the accrued benefit.  You can make it more restrictive going forward.  You would just have to record-keep two buckets for each vestable money type.

At least that's the way I've always seen it.

I'm disagreeing.

27 minutes ago, Luke Bailey said:

MWeddell, not exactly, and of course the issue is the law, not IRS position. The url you reference explains the law, and is consistent with my statement. This is not an issue like partial termination where there are open questions. To be more specific, and consistent with BG5150's comment, IRC sec. 411(a)(10)(A) prohibits any reduction in the vested percentage of any participant's accrued-to-date benefit, while 411(a)(1)(B) protects the vesting expectations as to future accruals only for participants with 3 or more years of service.

Most, but certainly not all, clients will want to also obey IRS positions instead of intentionally operating a plan contrary to IRS guidance.

You have summarized Code Section 411(a) and its regulations accurately.  I do not claim that the vesting schedule change would violate Code Section 411(a).  The link I provided uses a different rationale for explaining its conclusion.

In the example, a participant who has 1 year of service and is 0% vested on a 2-6 year (20% per year) graded vesting schedule is an a plan that is generally switching to a 3-year cliff vesting schedule.  The IRS concludes that the participant must have a vested percentage of 20% after earning his/her second year of vesting service.

Obviously it's fine if you or BG5150 disagree, but I certainly wanted to alert readers of this thread of the IRS' more restrictive position.

17 minutes ago, MWeddell said:

Most, but certainly not all, clients will want to also obey IRS positions instead of intentionally operating a plan contrary to IRS guidance.

You have summarized Code Section 411(a) and its regulations accurately.  I do not claim that the vesting schedule change would violate Code Section 411(a).  The link I provided uses a different rationale for explaining its conclusion.

In the example, a participant who has 1 year of service and is 0% vested on a 2-6 year (20% per year) graded vesting schedule is an a plan that is generally switching to a 3-year cliff vesting schedule.  The IRS concludes that the participant must have a vested percentage of 20% after earning his/her second year of vesting service.

Obviously it's fine if you or BG5150 disagree, but I certainly wanted to alert readers of this thread of the IRS' more restrictive position.

OK. I see what you're saying and agree with you. It's a great catch, but your statement "The IRS position is that one can't make a vesting schedule more restrictive for existing participants," is misleadingly overbroad. The example at the url says that as to they participant's accrued benefit as of the date of the amendment, you have to give them the vested percentage they would have under the old schedule, if they complete the required service, even if they are < 3 yos. So you can make the vesting schedule more restrictive for existing participants with < 3 yos, but IRS is saying you need to protect those participants' vesting expectations for their accrued benefit as of the date of the amendment, as well as their actual vested percentage in the accrued benefit.

So, if I have 5 yrs of service on a 3-yr cliff schedule, I'm 100% vested.  If my employer wants to change to a 6-yr graded, my old money (obviously) stays at 100% vested, but also all my future contributions?

(I've been fortunate to only have done vesting amendments a handful of times in my career, and they have all been a liberalization of the schedule.

On ‎12‎/‎10‎/‎2020 at 3:46 PM, BG5150 said:

So, if I have 5 yrs of service on a 3-yr cliff schedule, I'm 100% vested.  If my employer wants to change to a 6-yr graded, my old money (obviously) stays at 100% vested, but also all my future contributions?

(I've been fortunate to only have done vesting amendments a handful of times in my career, and they have all been a liberalization of the schedule.

Yes. And that does not implicate the point that MWeddell was making, but rather just the statutory rule of 411(a)(10)(B). Because in your example you have 3 or more years of service (i.e., you have 5 YOS), the plan can't change the vesting schedule on you, even as to future accruals, without giving you a choice. But in this case the choice (do I want 100% or 80%) is pretty pointless, so the plan would just have in the amendment that all persons with 3 or more years of service are 100% vested, and no choice would be solicited.

The point MWeddell was making, I think is this: Suppose in your example you had 2 YOS as of the date the plan is amended. Per the guidance described on IRS website, which goes beyond the words of the Code, if you make it to 3 YOS a year later, you should be fully vested in the portion of your account attributable to your first 2 YOS. But everything accrued after first 2 YOS would be subject to 6-year graded.

Back to the original question and the person who asked the first question. 

Strictly speaking I agree you can do these various buckets of vested money under the right conditions.  

As Luke pointed out these are all the legally correct answers and the first two answers are where the practical answer is.  Unless the client is willing to pay extra for you to track all the various buckets of people's money and the complex version of who is in what group just don't go there.

19 hours ago, Luke Bailey said:

OK. I see what you're saying and agree with you. It's a great catch, but your statement "The IRS position is that one can't make a vesting schedule more restrictive for existing participants," is misleadingly overbroad. The example at the url says that as to they participant's accrued benefit as of the date of the amendment, you have to give them the vested percentage they would have under the old schedule, if they complete the required service, even if they are < 3 yos. So you can make the vesting schedule more restrictive for existing participants with < 3 yos, but IRS is saying you need to protect those participants' vesting expectations for their accrued benefit as of the date of the amendment, as well as their actual vested percentage in the accrued benefit.

I agree with your refinement of what I wrote.  I wasn't intending to mislead but missed this nuance.