Here is your latest FYI: Employee Benefits
Update from Cindy Van Bogaert, Partner and Chair of the Employee
Benefits Practice Group at Boardman Law Firm LLP.
This FYI discusses
restrictions imposed by the Pension Protection Act of 2006 ("PPA")
on vesting of employer contributions in defined contribution plans.
Under
the pre-PPA law, employers generally could make matching contributions
(and top-heavy contributions) under a 3-year cliff or 2-to-6 year
graduated vesting schedule. (Under a 3-year cliff vesting schedule,
amounts are 100% vested after 3 years of vesting service, but 0%
vested before that date. Under a 2-to-6 year graduated schedule,
the employee is 20% vested after 2 years of vesting service, 40%
after 3 years, 60% after 4 years, 80% after 5 years, and 100% after
6 years.)
Under the pre-PPA law, employers generally could make
non-elective or profit sharing contributions under a 5-year cliff
or 3-to-7 year graduated schedule. (Certain plans, like safe harbor
plans, require faster vesting.)
The PPA amended the vesting minimums to impose the 3-year cliff
or 2-to-6 year graduated vesting schedule for employer non-elective
or profit sharing contributions. The change is generally effective
for contributions made in plan years beginning after December 31,
2006.
There are special rules regarding effective dates for ESOPs
and collectively bargained plans. An employer has an option to
allow the old schedule to continue to apply to contributions made
before the effective date (generally pre-2007 contributions).
What
should employers do?
- Employers with plans
with 5-year cliff or 3-to-7 year graduated schedules will need
to amend their plans.
- Employers should decide whether to apply
the new schedule only to post-effective date contributions or
to all account balances.
- Changes in vesting schedules may not
reduce the percentage already vested. Employers also should be
wary of the convoluted vesting election rules and the anti-cutback
rules. The vesting election rules generally allow participants
with at least 3 years of service to elect between old and new
schedules; however, the anti-cutback rules require that any old
contributions vest at least as rapidly as they would have under
the old schedule.
This FYI is not legal advice. Individuals should seek
advice based on their particular circumstances from their own counsel.
Nothing in this FYI is intended to be used, and no information
can be used, for the purpose of avoiding penalties under the Internal
Revenue Code, or promoting, marketing, or recommending to another
party any transaction or matter addressed in this FYI.
If you have any questions or need assistance, please contact Cindy
Van Bogaert at (608) 281-7543 or cvanbog@boardmanlawfirm.com.
Would you like to have FYI: Employee Benefits Update sent
directly to your e-mail inbox? If so, please send your request,
with e-mail address, to Cindy Van Bogaert at cvanbog@boardmanlawfirm.com. |
