403(b) Outlook: Vesting Requirements
October 22, 2008
What is the rule? Employee contributions to 403(b) retirement plans are always vested immediately. Employer contributions can, however, be subject to delayed vesting schedules. The two types of delayed vesting are cliff vesting, whereby a participant becomes 100 percent vested after completion of a specified period of service, and graded vesting which provides that benefits become vested gradually over time.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) imposed an accelerated vesting schedule on employer matching contributions made after 2001. Under the EGTRRA change, employer matching contributions subject to cliff vesting had to be 100% vested after completion of three years of service or, if subject to graded vesting, be at least 20% vested each year starting with year two (with 100% vesting after 6 years). However, employers were allowed to retain a slower vesting schedule for their non-matching employer contributions (5-year cliff or 3- to 7-year graded). The Pension Protection Act of 2006 (PPA) required employers to apply the accelerated schedule to all employer contributions made in plan years beginning after December 31, 2006.
What has changed under the final 403(b) regulations? The changes made to 403(b) plans' vesting schedules by EGTRRA and the PPA were largely unaffected by the final 403(b) regulations. However, for plans with delayed vesting, the final 403(b) regulations do require separate accounting for vested and non-vested accumulations. This will affect any contract in which only a portion of the employee's interest is vested.
Responsibilities for administrators: For institutions with retirement plans that are subject to delayed vesting, plan administrators must ensure that their 403(b) plan's vesting schedule conforms to the statutory requirements of EGTRRA and PPA. They should maintain accurate records relating to start date and time of service for all employees covered by the plan, so as to ensure that all vesting determinations are made appropriately. For plans with delayed vesting, to comply with the final 403(b) regulations, administrators must also ensure that there is separate accounting if there are different types of contributions that are subject to different vesting schedules and/or the plan has a graded vesting schedule.
Effective date: Jan. 1, 2009
What happens if you fail to comply? Failure to separately account for vested and non-vested accumulations is a contract failure which could result in the loss of tax deferral for all contracts.
How TIAA-CREF Helps: TIAA-CREF currently accounts for different contribution types on our record keeping system by using separate money sources. We are also in the process of expanding our vesting calculation capabilities. We will be providing additional details about these new capabilities as they are rolled out later in 2008.
Next week's issue: Loan Requirements