(b)lines Ask the Experts – Implementing a Vesting Schedule When There Wasn’t One

“We currently sponsor an Employee Retirement Income Security Act (ERISA) 403(b) plan where all contributions are 100% vested. However we are contemplating amending the plan to install a 5-year graded schedule for employer contributions.

“We know that the new schedule would apply to those hired after the effective date of the amendment, but how would the new vesting schedule affect existing plan participants? Would their vesting change?”


Stacey Bradford, with Groom Law Group, answers:


You have identified a complicated plan design issue for employers.


A change to a vesting schedule that lengthens the period of service required to become 100% vested in employer contributions to an ERISA 403(b) plan is subject to certain requirements under ERISA that protect current participants. ERISA section 203(c)(1)(A) prohibits reducing a participant’s vested percentage in his plan account as of the date prior to the effective date of the change. Therefore, current participants must retain their 100% vested interest in their accounts as of the date prior to the effective date of the new vesting schedule, and the new vesting schedule may apply only to contributions made on and after its effective date. 


In addition, under ERISA section 203(c)(1)(B), participants with at least three years of service with the employer must have the opportunity to elect to remain under the prior vesting schedule. Thus, as a practical matter, a 100% vesting schedule will continue to apply to new contributions on behalf of participants with three years of service. 


Although the new vesting schedule may be applied to participants with less than three years of service, an employer may choose to treat all current participants the same and apply the new vesting schedule only to new hires. With any vesting schedule change, it is critical to communicate clearly to your plan’s recordkeeper the new vesting schedule and to whom it applies. As always, please consult your plan’s legal counsel if you are contemplating an amendment to your plan.



NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.


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