Question

Abel Co. is establishing a defined contribution plan. They have a lot of turnover among employees during the first 18 months of employment and have decided to use 2 years of eligibility for employees to take part in the plan. What impact will this have?

a.) Two-year eligibility is not allowed.
b.) They must use 3-year cliff vesting.
c.) There are no repercussions for extending the time required for eligibility.
d.) Two-year immediate vesting will be required.

Answer 1

Abel Co. can have a two-year eligibility requirement for their defined contribution plan without significant repercussions but must still comply with IRS and ERISA vesting schedule regulations.

Step-by-step explanation:

The student is asking about the repercussions of Abel Co. establishing a defined contribution plan with a two-year eligibility criterion for employees to participate. Based on current typical practices and regulations for defined contribution plans such as 401(k)s and 403(b)s, extending the eligibility period to two years is generally allowed.

It provides the company with a timeframe suited to its high employee turnover rate during the first 18 months. However, it is important to consider that IRS guidelines and ERISA standards set forth specific vesting schedules that must be followed once an employee is part of the plan. A two-year eligibility requirement does not automatically prescribe immediate vesting, as vesting schedules can differ from eligibility requirements.

Moreover, a vesting schedule, such as 'cliff vesting' where employees become 100% vested after a certain period or a graduated vesting schedule where employees gradually become vested over time, will need to be established separately from the eligibility rule. Therefore, the correct response would likely be that there are no significant repercussions for extending the eligibility time, but the plan must still comply with vesting schedules as per the regulations (option c).