SERVICE SIMPLIFIES MINIMUM VESTING STANDARDS APPLIED IN SECURING A DETERMINATION LETTER.

Rev. Proc. 89-29

SECTION 1. PURPOSE

This revenue procedure provides final guidelines resulting from the reconsideration of Rev. Proc. 75-49, 1975-2 C.B. 584.

SEC. 2. CHANGE

This revenue procedure provides that, effective for plan years beginning after December 31, 1988, the tests described in Rev. Proc. 75-49, as modified by Rev. Proc. 76-11, 1976-1 C.B. 550, will no longer apply.

SEC. 3. BACKGROUND

01 Rev. Proc. 75-49, as modified by Rev. Proc. 76-11, provides guidelines that are followed by the Internal Revenue Service in determining, for purposes of an advance determination letter under section 601.201(o) of the regulations (Statement of Procedural Rules), whether the vesting schedule of an employee plan discriminates, or is likely to discriminate, in favor of employees who are officers, shareholders, or highly compensated (the "prohibited group"). Those guidelines are concerned only with the circumstances in which a faster rate of vesting than would otherwise be required is appropriate for advance determination purposes due to actual or potential discrimination in the accrual of benefits or forfeiture sin favor of the prohibited group.

02 Rev. Proc. 75-49 established tests (the "key employee test" and the "turnover test") by which such discrimination would be ascertained in connection with an advance determination letter. If an employer could not satisfy these tests (when applicable), an advance determination letter would in no event be issued if the plan provided vesting at a rate less rapid than 40 percent after four years of employment, an additional 5 percent for each of the next two years, and an additional 10 percent for each of the following five years ("four forty vesting"). A plan which satisfied the requirements of this test would not be required to satisfy the key employee test or the turnover test for purposes of an advance determination as to its qualified status.

03 Comments received by the Service suggested that a large number of employers might not be able to show compliance with Rev. Proc. 75-49 without the 4-40 vesting rate set forth therein. It was decided that Rev. Proc. 75-49 would be reconsidered by the Service.

04 Pending completion of the reconsideration of Rev. Proc. 75- 49, the Service has, for purposes of issuing favorable determination letters, treated the vesting schedule of a plan as satisfying the nondiscrimination requirements of section 401(a)(4) of the Code if the plan satisfies the minimum vesting requirements of section 411(a)(2) (if applicable) and, in addition, any one of three conditions set forth in section 3.01 of Rev. Proc. 76-11. Those conditions are as follows:

(1) the plan complies with the tests contained in Rev. Proc. 75- 49, either by (i) adoption of 4-40 vesting, or (ii) satisfaction of the key employee tests or the turnover test (whichever test or tests may be applicable); or

(2) in the case of any plan which had previously been the subject of a favorable advance determination letter that has not been revoked, the percentage of vesting of each participant provided under the plan, as amended, is not less (at every point) than that provided under the vesting schedule of the plan upon which such most recent prior determination letter was based; or

(3) there is a demonstration, to the satisfaction of the Service, on the basis of all the facts and circumstances, that there has not been, and there is no reason to believe there will be, an accrual of benefits or forfeitures tending to discriminate in favor of the prohibited group.

05 Section 4 of Rev. Proc. 76-11 provides that, pending completion of the reconsideration of Rev. Proc. 75-49, an applicant may request in writing that its application be processed without regard to whether the vesting provisions of the plan satisfy the nondiscrimination requirement of section 401(a)(4) of the Code. However, a determination letter issued to such an applicant will contain a caveat to the effect that such letter is not a determination as to whether the vesting provisions of the plan satisfy the nondiscrimination requirements of section 401(a)(4). Upon publication of final guidelines resulting from the reconsideration of Rev. Proc. 75-49, an applicant that had been issued a determination letter containing such a caveat may request, upon satisfying such guidelines, to have the caveat deleted. Such a request will be considered a continuation of the previous request for a determination letter and will therefore not require either the filing of a new application or additional notification of interested parties.

06 With regard to the situation in which a plan fails to satisfy any of the three conditions described in section .04 above and in which the alternative described in subsection .05 has not been requested, section 3.04 of Rev. Proc. 76-11 states that such plan shall not be required by the Service to provide a vesting schedule more rapid that 4-40 vesting as a condition to the issuance of a favorable advance determination letter, except, however, that, pursuant to section 411(d)(1) of the Code, the Service may require vesting more rapid than 4-40 vesting if there has been a pattern of abuse under the plan or actual misuse of the plan in operation which affects the qualified status of the plan or trust.

SEC. 4. SCOPE

This revenue procedure applies solely for purposes of advance determination letters, and therefore does not apply in cases where the qualified status of a plan or trust under section 401(a) or 403(a) of the Code is determined upon examination of its operations. This revenue procedure also does not apply in determining whether there has been a pattern of abuse under a plan (such as the intentional dismissal of employees to prevent vesting) or actual misuse in the operation of a plan which affects the qualified status of the plan or trust.

SEC. 5. LEGISLATIVE CHANGES AFFECTING VESTING

01 The Tax Reform Act of 1986 (TRA '86)

(1) Section 1113(a) of TRA '86, 1986-3 (Vol. 1) C.B. 1, 363, changed the minimum vesting standards under section 411 of the Code. The changed standards provide that a plan is not a qualified plan unless a participant`s employer-provided benefit vests at least as rapidly as under one of two alternative vesting schedules or, in the case of an employee covered by a multiemployer plan pursuant to a collective bargaining agreement, the employee has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions upon completion of 10 years of service. A plan satisfies the first alternative vesting schedule if a participant has a nonforfeitable right to 100 percent of the participant`s accrued benefit derived from employer contributions upon completion of 5 years of service. A plan satisfied the second schedule if a participant has a nonforfeitable right to at least 20 percent of the participant's accrued benefit derived from employer contributions upon completion of 5 years of service. A plan satisfies the second schedule if a participant has a nonforfeitable right to at least 20 percent of the participant`s accrued benefit derived from employer contributions after 3 years of service, 40 percent at the end of 4 years of service, 60 percent at the end of 5 years of service, 80 percent at the end of 6 years of service, and 100 percent at the end of 7 years of service. This change is effective generally for plan years beginning after December 31, 1988.

(2) Section 1114(b)(10) of TRA '86 changed section 411(d)(1) of the Code, effective generally for years beginning after December 31, 1988, by substituting "employees who are highly compensated employees (within the meaning of section 414(q))" for "employees who are officers, shareholders, or highly compensated."

02 Special Rules for Top-Heavy Plans. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 1982-2 C.B. 462, established requirements that must be met by a top-heavy plan as defined in section 416(g) of the Code. Such a plan must meet the vesting requirements of section 416(b) and the minimum benefit requirements of section 416(c). In order to meet the vesting requirements of section 416(b), a top-heavy plan must provide either "3-year vesting" or "6-year vesting."

(1) A top-heavy plan satisfied the 3-year vesting requirement under section 416(b)(1)(A) if an employee who has completed at least three years of service with the employer or employers maintaining the plan has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.

(2) A top-heavy plan satisfies the 6-year vesting requirement under section 416(b)(1)(B) if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from employer contributions determined under the following table:

                   Years of            Nonforfeitable

As the result of its reconsideration of Rev. Proc. 75-49, and in light of the legislative changes described in Section 5 above, the Service has concluded that, for purposes of an advance determination as to whether a plan's vesting rate is rapid enough, the key employee test, the turnover test and the four-forty vesting test will not be applied with respect to plan years beginning after December 31, 1988. Instead, a plan that satisfies the minimum vesting standards under section 411(a)(2) as amended by TRA '86 or, in the case of a top- heavy plan, the requirement of section 416(b), will be deemed to provide a rapid enough rate of vesting for purposes of an advance determination letter unless there has been a pattern of abuse or actual misuse in the operation of the plan. The interim tests set forth in Rev. Proc. 76-11 will continue to apply until the effective date of this change.

SEC. 7. EFFECT ON OTHER DOCUMENTS

Rev. Procs. 75-49 and 76-11 are superseded for plan years beginning after December 31, 1988.

SEC. 8. EFFECTIVE DATE

This revenue procedure applies to determination letters issued with respect to plan years beginning after December 31, 1988.

DRAFTING INFORMATION

The principal author of this revenue procedure is John H. Turner of the Employee Plans Technical and Actuarial Division. For further information regarding this revenue procedure, please contact the Employee Plans Technical and Actuarial taxpayer assistance telephone service between the hours of 1:30 p.m and 4:00 p.m. Eastern Time. Monday through Friday, on (202) 566-6783/6784 (not a toll-free call).