Company A has a 3 year cliff vesting schedule but no employer contributions have been made (401k only so far). Company B has a 5 year graded schedule. Company A is merging into Company B. Even though there are no ER contributions in Co A’s plan do we have to allow the participants the right to choose the 3 year cliff if they have at least 3 years of service? I know the answer is yes if there were actual $$s.

ah ha. if you change your situation from 3 yr cliff and 5 yr graded to
5 yr cliff and 7 yr graded you have the example provided in the regs
I mention this because even those who have less than 3 years of service are still deemed to have a protected benefit - old money has to be protected with the old vesting schedule. in your particular case it is a moot point since their is no old money, but it is food for thought.


Example 4 (A) Employer O sponsors Plan D, a qualified profit sharing plan under which each employee has a nonforfeitable right to a percentage of his or her employer-derived accrued benefit based on the following table:

------------------------------------------------------------------------
Completed years of service Nonforfeitable percentage
------------------------------------------------------------------------
Fewer than 3.............................. 0
3......................................... 20
4......................................... 40
5......................................... 60
6......................................... 80
7......................................... 100
------------------------------------------------------------------------

(B) In January 2006, Employer O acquires Company X, which maintains Plan E, a qualified profit sharing plan under which each
employee who has completed 5 years of service has a nonforfeitable
right to 100% of the employer-derived accrued benefit. In 2007, Plan
E is merged into Plan D. On the effective date for the merger, Plan
D is amended to provide that the vesting schedule for participants
of Plan E is the 7-year graded vesting schedule of Plan D. In
accordance with section 411(a)(10)(A), the plan amendment provides
that any participant of Plan E who had completed 5 years of service
prior to the amendment is fully vested. In addition, as required
under section 411(a)(10)(B), the amendment provides that any
participant in Plan E who has at least 3 years of service prior to
the amendment is permitted to make an irrevocable election to have
the vesting of his or her nonforfeitable right to the employer-
derived accrued benefit determined under either the 5-year cliff
vesting schedule or the 7-year graded vesting schedule. Participant
G, who has an account balance of $10,000 on the applicable amendment
date, is a participant in Plan E with 2 years of service as of the
applicable amendment date. As of the date of the merger, Participant
G's nonforfeitable right to G's employer-derived accrued benefit is
0% under both the 7-year graded vesting schedule of Plan D and the
5-year cliff vesting schedule of Plan E.
(ii) Conclusion. Under paragraph (a)(3) of this section, the
plan amendment does not satisfy the requirements of this paragraph
(a) and violates section 411(d)(6), because the amendment places
greater restrictions or conditions on the rights to section
411(d)(6) protected benefits with respect to G and any participant
who has fewer than 5 years of service and who elected (or was made
subject to) the new vesting schedule. A method of avoiding a section
411(d)(6) violation with respect to account balances attributable to
benefits accrued as of the applicable amendment date and earnings
thereon would be for Plan D to provide for the vested percentage of G and
each other participant in Plan E to be no less than the greater of
the vesting percentages under the two vesting schedules (for
example, for G and each other participant in Plan E to be 20% vested
upon completion of 3 years of service, 40% vested upon completion of
4 years of service, and fully vested upon completion of 5 years of
service) for those account balances and earnings.
[Treas Reg §1.411(d)-3(a)(4) example 4]
(I have this handy only because I have to update a book, and this was in the final regs issued Aug 9, 2006 so I am readily aware of it!)

Are the plans merging?

Yes, the plans are merging.

So if no company money has ever been funded under the 3 year cliff vesting schedule, must that 3 year cliff schedule be offered to participants as they merge into the new plan?