Vesting Requirements
February 28, 2007 PRE-EGTRRA RULES Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Internal Revenue Code Section 411 – Minimum Vesting Requirements, specifically IRC Sectoin 411(a)(2), provided for the following: 2) Employer contributions Except as provided in paragraph (12), a plan satisfies the requirements of this paragraph if it satisfies the requirements of subparagraph (A) or (B). (A) 5-year vesting A plan satisfies the requirements of this subparagraph if an employee who has completed at least 5 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions.
(B) 3 to 7 year vesting A plan satisfies the requirements of this subparagraph if an employee has a nonforfeitable right to a percentage of the employee’s accrued benefit derived from employer contributions determined under the following table: Years of service: The nonforfeitable percentage is:
3 20
4 40
5 60
6 80
7 or more 100 EGTRRA RULES Effective for plan years beginning after December 31, 2001, EGTRRA shortened the allowable vesting schedules for match accounts to a maximum of 3-year (“cliff”) vesting or 2 to 6 year (“graded”) vesting. PPA RULES The Pension Protection Act of 2006 (PPA) expanded the EGTTRA match-vesting requirements to all defined contribution accounts effective for plan years beginning after December 31, 2006. However, it did provide an exception for ESOPs that had an ESOP loan outstanding on September 26, 2005: The new vesting requirements “shall not apply to any plan year beginning before the earlier of— (A) the date on which the loan is fully repaid, or (B) the date on which the loan was, as of September 26, 2005, scheduled to be fully repaid.” What if you have some leveraged shares (that meet the requirements of the exception) and some non-leveraged shares? I have heard some advisors take the position that the entire plan can maintain the old vesting schedule until the above-mentioned exception no longer applies. If you are in this situation you should discuss this with your ESOP consultant or counsel. The new rules apply only to contributions made on or after the effective date of the new vesting schedule. However, if the vesting schedule was not changed retroactively for prior contributions, you would need to maintain separate accounts with separate vesting schedules. Many plans will apply the new schedule to all contributions to avoid the record keeping and communication complexities created by two separate vesting schedules. The new rules only apply to employees who work an hour of service after the effective date of the new vesting schedule. Therefore you will not be required to increase the vesting for participants who terminated prior to the date of the change. The ESOP Blog provides a summary of the vesting requirements, including the following vesting decisions that you will need to make if you are not currently satisfying the vesting requirements: - Which vesting schedule will you use?
- If you are a leveraged ESOP, do you want to delay the change in vesting schedules as allowed under the exception outlined above?
- Do you want to apply the new vesting schedule to all balances or only to amounts accumulating in post – 2006 plan years?
- Do you want to limit the application of the new vesting schedule to participants who have an hour of service in the first plan year beginning after December 31, 2006?
Your plan document does not need to be amended to reflect these decisions until the end of the 2009 plan year. Nevertheless, you may choose to adopt an amendment now to record the decisions made and you may also want to communicate the new vesting provisions to your employees at this time.
A more detailed explanation of the new vesting rules can be found here. | 
