Who Is Immediately Vested Upon Plan Termination?

“I work with a 403(b) plan sponsor that will be terminating its plan. Can you confirm that affected participants—those who would be immediately vested—only includes non-vested participants that have not taken their full account value and have not had a 5-year break-in-service? In other words, if a non-vested participant took a distribution one year before the plan termination, that person would not be affected?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Correct, non-vested employees who took distributions prior to the plan termination date would not be affected. Per the IRS webpage on 401(k) plan terminations (the rules are the same for 403(b) plans with regard to this particular issue):

“100% vesting

All affected participants become fully vested in their account balances on the date of the full or partial plan termination, regardless of the plan’s vesting schedule.

• Elective deferrals are always 100% vested.

• Full vesting in a plan termination applies to employer nonelective contributions (such as profit-sharing contributions) and to matching contributions.

Full termination – Affected participants are current or former employees who haven’t received full payment of their vested interest by the plan termination date, unless they’ve incurred at least 5 consecutive 1-year breaks in service.”

Thus, if the participant in question took a full distribution of his vested amount one-year prior to the plan termination date, that person would not need to be fully vested in amounts that were not vested as of the date of that prior distribution because it occurred prior to the plan termination date.

Note that this response only addresses vesting upon plan termination; see our prior Ask the Experts column on this issue of whether such full and immediate vesting can occur on the date there is a complete discontinuance of contributions to a 403(b) plan.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.