My client has a 401(k) plan that provides for matching contributions with a 20% per year of service vesting. Let's assume that effective 1/1/05, the plan sponsor is going to change the plan to a safe harbor plan by making the mandatory matching contributions beginning in 2005 with 100% vesting. Question? What about matching contributions that were made prior to 2005? Must they fully vest when the plan become a safe harbor plan, or can they continue to vest based on the graded schedule?

They can continue to vest based on the graded schedule.

I have a follow up question. Can you change the vesting schedule to 100% vesting for the active participants only (i.e. terminated participants remain on old vesting schedule)?

Yes you can amend the vesting schedule for actives only. The terminated folks would not become vested and since they are terminated they would not have any chance of additional vesting.