Employer wants to change vesting schedule effective 01-01-07.

Employer contributions made prior to 01-01-07 will continue to vest on the prior 5 yr cliff vesting schedule and beginning 01-01-07, any contributions made will vest on the 6 yr graded schedule; of course, salary deferrals are 100% vested.

Is this a problem? Any IRC/reg guidance would be appreciated.

Thanks!

You must comply with transition rules for vesting. See section 411 and regulations. For example, anyone with 3 years of service by December 31 will have to be 100% vested in post 2006 contributions after 5 years of service, unless we get some regulatory dispensation. Indeed, any IRS guidance would be appreciated.

on old money, it doesn't matter how many years the person had. the old money is a protected benefit.
the IRS example is provided below.
when the vesting rules switched for match a few years ago, I thought the rule was you could track the vesting on old money under old rules and new money under new rules.



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]