Rev. Rul. 85-31

1985-1 C.B. 153, 1985-12 I.R.B. 5.

QUALIFICATION; VESTING; BENEFITS REDUCED UPON DISCHARGE FOR CAUSE

Published: March 25, 1985

Section 401.-Qualified Pension, Profit-Sharing, and Stock Bonus Plans, 26 CFR 1.401-4: Discrimination as to contributions or benefits.

Section 411.-Minimum Vesting Standards, 26 CFR 1.411(a)-4: Forfeitures, suspensions, etc.

(Also Section 401; 1.401-4.)

  Qualification; vesting; benefits reduced upon discharge for cause. A plan will not fail to satisfy the minimum vesting standards of section 411(a)(2) of the Code merely because it provides that vested benefits in excess of those required to be nonforfeitable may be forfeited by an employee discharged for cause. However, the plan may violate the nondiscrimination requirements of section 401(a)(4) if the reduction results in the discrimination prohibited by that section. Rev. Rul. 71-92 superseded.

PURPOSE

  The purpose of this revenue ruling is to restate the position in Rev. Rul. 71-92, 1971-1 C.B. 122, in view of the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406, 1974-3 C.B. 1.

ISSUE

  Will an employee retirement plan that provides for graduated vesting fail to satisfy the minimum vesting standards of section 411(a)(2) of the Internal Revenue Code if the plan provides that, upon discharge for cause, a participant's nonforfeitable benefits are reduced by applying a slower graduated vesting schedule under the circumstances described below?

FACTS

  An employee retirement plan provides that an employee's employer-derived accrued benefit is 40-percent vested upon completion of four years of service with the employer. The employees are credited with an additional five percent of each of the next two years of service and an additional ten percent for each year of service thereafter, such that employees are 100-percent vested upon completion of 11 years of service with the employer. However, for any employee who is discharged because of misconduct or dishonesty, the plan provides that employer-derived benefits will be vested only to the extent of 25 percent for five years of service and an additional ten percent for each year of service thereafter, such that the affected employees are 100-percent vested upon completion of 15 years of service with the employer. The plan does not define the terms 'misconduct' and 'dishonesty'. Additionally, the plan provides that, in any event, participants' benefits are nonforfeitable upon attaining normal retirement age, or upon termination or partial termination of the plan, or a complete discontinuance of contributions under the plan. The plan is not a top- heavy plan as defined in section 416(g), and, thus, top heavy vesting is not required for participants in the plan.

LAW AND ANALYSIS

  Section 401(a)(4) of the code requires that either the contributions or benefits provided under a plan must not discriminate in favor of employees who are officers, shareholders, or highly compensated.

  A plan that is subject to section 411 of the Code is not qualified under section 401(a) unless the accrued benefits derived from employee contributions are nonforfeitable as required by section 411(a)(1), and one of the three alternative minimum vesting requirements of section 411(a)(2) is satisfied. One alternative requires a 25-percent nonforfeitable right to the employer-derived accrued benefit upon the completion of five years of service, with an additional five percent for each of the next five years of service and an additional ten percent for each year of service thereafter, such that the employee is 100-percent vested upon completion of 15 years of service for the employer.

  Section 1.411(a)-3(a)(2) of the Income Tax Regulations provides that a plan will not satisfy the requirements of section 411(a)(2) of the Code unless the plan satisfies all the requirements of a particular alternative vesting schedule with respect to all of an employee's years of service.

  Section 1.411(a)-4(a) of the regulations provides that to the extent that rights are not required to be nonforfeitable to satisfy the minimum vesting standards or the nondiscrimination requirements of section 401(a)(4) of the Code, such rights may be forfeited without regard to the limitations on forfeitability of section 411(a).

  Accrued benefits that are subject to divestiture upon the discharge of an employee for cause are not forfeitable within the meaning of section 411(a) of the Code. However, a provision for slower vesting in the case of employees discharged for cause will not result in failure of a plan to satisfy the requirements of section 411(a) if both the slower vesting schedule and the vesting schedule applicable to the other employees satisfy the same alternative minimum vesting schedule of section 411(a)(2) and employee-derived benefits are nonforfeitable at all times.

  In this case, the five- to fifteen-year vesting schedule applicable to employees discharged for cause satisfies the minimum vesting standards of section 411(a)(2)(B) of the Code. Also, the four- to eleven-year vesting schedule that applies to all other employees satisfies the minimum vesting standards of section 411(a)(2)(B). Thus, the application of the slower vesting schedule to employees discharged for cause results only in the reduction of nonforfeitable rights which exceed the minimum vesting standards. However, the plan may fail in operation to satisfy the requirements of section 401(a)(4) if the reduction of nonforfeitable benefits for those employees discharged for cause results in the discrimination prohibited by that section.

HOLDING

  The plan in this case does not fail to satisfy the minimum vesting standards of section 411(a)(2) of the Code merely because of the inclusion of the plan provision reducing vesting in certain circumstances. However, this ruling does not consider whether the nondiscrimination requirements of section 401(a)(4) are satisfied. In addition, this ruling does not deal with the vesting requirements of section 416.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 71-92 is superseded because the position stated therein is restated under current law in this revenue ruling.

Rev. Rul. 85-31, 1985-1 C.B. 153, 1985-12 I.R.B. 5.