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VESTING

What are the vesting methodologies?

Plans typically choose elapsed time or hours.

Elapsed time is the easiest to administer, as with each hiring anniversary, the participant is credited with a year service. The downside to this approach:

  • Participants who work less than 1,000 hours each year will receive a year of vesting.
  • Absences during the year are disregarded, hence seasonal employees receive a year of service if they are employed on the 365 mark (anniversary date)

Please note, vesting only applies to company monies, so if a participant does not qualify for the profit sharing contribution (1,000 hour requirement), it may not matter. However some plans offer immediate eligibility for the 401(k) portion and offer a company match. In this environment, the participant will receive a year of service with each anniversary date.

The hours of service methodology requires the plan to track hours. Once the participant receives the required hours for the vesting calculation period, they receive a year of service. The vesting calculation period is often the plan year (as opposed to anniversary year which can be difficult to administer). With this methodology, if a plan dictates 1,000 hours in a plan year to receive a year of vesting, the participant is credited with a year of service when they achieve the hours (not at the end of the year). Therefore it is important to review vesting for participants that terminate during the plan year as they may achieved another vesting year of service.

Please note, the plan document may use the word consecutive month period. This relates to the period of review (12 month review period, if 1,000 hours in the 12 month period) and not the employees period of service (hence a seasonal employee that works two periods in the 12 month period may qualify for a year of vesting).

Regardless of the methodology, the vesting reviews start with day one, not when the participant becomes eligible for the plan. This also includes participants who are not eligible for the plan until age 21! If they start work at age 19, the vesting review begins then.

 

What are the maximum vesting schedules (post PPA of 2006) for defined contribution plans?

For plans years starting after December 31, 2006, the maximum schedules are as follows:

  • 6 year graded
  • 3 year cliff

Participants that terminated before December 31, 2006 on vesting schedules that are less favorable are not accelerated to the new requirements.

 

Why do recordkeeping systems provide vesting as information only and as a plan sponsor how do we make sure the vesting is correct when a distribution is required?

Most recordkeeping systems accurately provide vesting for elasped time (as the anniversary date of the hire date is the trigger) for participants that do not have a re-hire date (assuming the hire date is correct).

For plans that use the hours of service methodology, the recordkeeping system is only as good as the input provided by the plan sponsor. If the plan sponsor does not provide hours with each contribution upload, the vesting may be delayed. If the plan sponsor provides hours with the year-end census, then the vesting can be updated.

For plan sponsors that use the TPA or unbundled service model, it is important to work with a TPA and recordkeeping service provider that work well together. The unbundled service models include:

  • The recordkeeping service provider provides the TPA with on-demand full inquiry and reporting capability (for any time period at the plan or participant level.
  • The recordkeeping system provides vesting on the participant statements (online and paper) as information only service and leverage the TPA to review vesting when a participant terminates service and requests a distribution.
  • The distribution process is electronic at the recordkeeping service provider/TPA level and only requires the plan sponsor one layer of authorization on the form (as opposed to authorizing a paper form, then sending to the TPA for authorization, and then forwarding to the recordkeeping service provider). Please note, some of the leading open archeticture recordkeeping platforms provide vesting calculation services and do not require the TPA involvement, if the TPA approves (thus streamlining the process and eliminating a layer).

The content of this website is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.

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