Vesting Amendment and Terminated Employees

A plan is amending vesting to a more liberal vesting schedule.   They want this to apply to all balances active and terminated.  We are getting push back from the administrator that the new vesting can only be applied to current employees and terminated employees are required to stay on the prior more restrictive schedule.  I have never run into this below and does not seem correct.  Anyone else run into this?

No. What happens if the plan terminates? Will they only fully vest actives? The only issue I'm aware of is that an amendment that increases benefits for former employees must be looked at for non-discrimination separately with respect to such former employees. If your group of former employees with balances is predominantly HCEs and many NHCEs have already been cashed out at the lower vested percentage, then you could have an issue.  

  IRS Web Page on 401(k) Plan Terminations says: "100% vesting applies to Affected Participants. "Affected Participants" are current or former employees who have not received full payment of their vested interest... unless they have incurred at least 5 consecutive 1 year breaks in service."  I realize that you are not dealing with a plan termination but thought this was a useful rule to examine.   The IRS language certainly does not suggest that some former employee Participants with balances and  without  5 1 year breaks-in service be kept on a more restrictive vesting schedule.

Ask the administrator for a cite to support the rule they are suggesting and ask them to explain the inconsistency with the IRS Rule regarding 100% vesting in the event of plan termination.

A look at two documents is in order. 

First, how does the amendment read? If the amendment clearly specifies that the amendment only applies to participants employed on the effective date of the amendment or only effective to participant who earn at least 1 hour of service after the effective date then I think terminated employees would clearly not be subject to the change. However, if the amendment is silent on which participants are affected by the vesting change, there may still be a question (see below).

Secondly, read the plan document to see if it is written in such a way as to exclude terminated participants from vesting schedule amendments.

If both the amendment and the document are silent on this issue, I think a question still exists re: the effect of the vesting schedule change on terminated participants.