(b)lines Ask the Experts – Rules for Vesting Schedules Shorter Than Maximum Permissible

“I read your Ask the Experts last year on the maximum permissible vesting schedules for a defined contribution retirement plan. But what if I don’t use the maximum vesting schedules for employer contributions (three year cliff or six-year graded)? What other restrictions apply?”
By PS

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

 

The key restriction with respect to any alternative vesting schedule you might use is that it must be at least as generous in all years of service as the maximum permissible vesting schedule. For example, let’s say you have a two-year cliff vesting schedule (0% vested after one year of service, and 100% vested after two years of service). That schedule would be fine, since the vesting would be as generous, or more so, in all years of service as the maximum three-year cliff vesting schedule (0% vested after one year, 0% vested after two years, 100% vested after three years).

 

However, it can become a bit more complicated when putting together a graded vesting schedule. Let’s say I want to put together a five-year graded vesting schedule that looks like this:

 

Completion of Year  1   2   3   4   5

Vested % 0   20    30    50    100

 

Even though, at first glance, this would appear to be more generous than a six-year graded schedule, careful analysis of the two schedules side-by-side reveals that this is not the case

 

Completion of Year 1   2   3   4   5   6

Vested % (proposed) 0   20    30    50    100 100

Vested % (six year 0   20    40    60    80    100

Graded)

 

In years 3 and 4 the proposed 5-year graded vesting schedule is actually less generous after the completion of two and three years of service, though it would be more generous after the completion of 5 years of service. Thus, the proposed schedule would not be permitted, as it is not at least as generous as the maximum permissible schedule in all years of service.

 

And remember, the rules above do not apply to governmental and non-electing church plans. Special pre-ERISA rules apply to such plans.

 

 

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.

 

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@strategic-i.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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