3923 / What vesting requirements apply to top-heavy plans?

A top-heavy plan must provide that an employee has a non-forfeitable right to his or her accrued benefit derived from employer contributions in accordance with one of the two following requirements:

1. Three-year vesting. An employee who has completed at least three years of service with the employer must have a non-forfeitable right to 100 percent of his or her accrued benefit.¹


2. Six-year graded vesting. An employee who has completed at least two years of service must have a non-forfeitable right to at least the following: 20 percent of his or her accrued benefit after two years of service, and 20 percent additional for each of the following years of service, reaching 100 percent after six years of service with the employer.²

Except to the extent that they are inconsistent with these fast vesting schedules, the rules that pertain to vesting in qualified plans generally (including years of service and breaks in service, etc.) apply for purposes of the fast vesting requirements.³ Thus, the fast vesting schedules are not safe harbors; even faster vesting may be required by IRC Section 411(d) where there is a pattern of abuse ( Q 3869).

When a plan becomes top-heavy, fast vesting under one of the two schedules generally must be applied to all benefits accrued under the plan for the current plan year and all prior plan years (including benefits accrued in years before the plan became top-heavy and benefits accrued before the effective date of the top-heavy rules). The accrued benefit of any employee who does not have an hour of service after the plan became top-heavy, and any accrued benefits that were forfeited before the plan became top-heavy, need not be covered by the fast vesting
schedule.⁴

Although the IRC does not require that fast vesting be applied to benefits accrued in future plan years in which a plan is not top-heavy, a return to the plan’s slower vesting when the plan ceases to be top-heavy in many cases may be impractical or impossible. For example, IRC Section 411(a)(10) requires that a change in vesting schedules not reduce a participant’s non-forfeitable percentage in his or her accrued benefit and that participants with at least three years of service be allowed to elect to be covered by the previous vesting schedule
( Q 3869).⁵

Integration

Although the IRC does not prohibit integration in a top-heavy plan, the fast vesting and minimum benefit (and contribution) requirements must be satisfied without considering employer payments of FICA taxes or contributions or benefits made or received under any other federal or state law.⁶