When a defined contribution plan terminates, must all participants become 100% vested?
Rev. 07/03/03, E-mail Alert 2003-12

Yes. Internal Revenue Code §411(d)(3) requires 100% percent vesting of all “affected employees” when a plan is terminated.

Affected employees in a defined contribution plan include all active participants still employed and former employees who have not yet had a forfeiture of their nonvested amount. Forfeiture of the nonvested amount may occur at the earlier of either five consecutive one-year breaks in service or timely distribution of the entire vested portion of their account. Under Treasury Regulation, a distribution is timely only if it occurs by the close of the second plan year after the employee separates from service. Even then, the mere distribution of the vested account balance is not the forfeiture of the non-vested account. Rather, the plans forfeiture provisions should be followed whether the amounts are reallocated, used to reduce employer contributions or to pay plan expenses. For administrative convenience, many plans hold forfeitable amounts in a forfeiture account pending actual forfeiture.

Must a former employee who was 60% vested and who had received a distribution of his entire vested account balance in 2008 have to become 100% vested if the plan terminates in 2009?
Rev. 07/03/03, E-mail Alert 2003-12 Updated 12/29/08

As with many other questions, the answer to this question is, it depends on the terms of the plan. If under the terms of the plan document, the time for the actual forfeiture of the remaining 40% of his or her account balance has not yet occurred at the plan’s termination date, the former participant must be 100% vested. However, if the document’s timing for forfeitures occurred prior to the plan termination date then the former participant does not become 100%; vested since the amount has already been forfeited away and there is nothing to increase vesting upon.