5.4 Mandatory Full-Vesting Events, Vesting Schedule Amendments & the 3-Year Election

Beyond the Schedule

Most vesting questions ask you to run a participant's Years of Service against a 3-year cliff or 2-to-6-year graded schedule. But IRC §411(d)(3) overrides every schedule in three circumstances, and IRC §411(a)(10) governs what happens when the sponsor changes the schedule. These rules are heavily tested because they produce counter-intuitive answers: a participant with one Year of Service can end up 100% vested.

The Three Mandatory Full-Vesting Events

1. Complete Termination

On termination, every participant becomes fully vested in their account balance. Forfeitures that have not yet been allocated must be allocated; the plan cannot terminate with an unallocated suspense balance sitting in it. A terminating plan is also expected to be amended for all current law before assets are distributed.

2. Partial Termination — the 20% Turnover Presumption

Rev. Rul. 2007-43 supplies the operative test. A partial termination is presumed where the turnover rate is 20% or more for the applicable period.

$\text{Turnover Rate} = \frac{\text{Participating employees who had an employer-initiated severance during the period}}{\text{Total participants at the start of the period} + \text{participants who entered during the period}}$

Key mechanics tested on the exam:

• The numerator counts employer-initiated severances only. Routine voluntary quits, deaths, disabilities, and retirements are excluded. Layoffs, reductions in force, plant closings, and terminations "for cause" that are really cost-cutting all count.
• The applicable period is normally the plan year, but the IRS will aggregate consecutive plan years when a single reduction in force is spread across them.
• 20% is a presumption, not a bright line. A lower rate can still be a partial termination on facts and circumstances, and a higher rate can be rebutted where turnover is routine for that business.
• "Affected participants" are the ones who severed employment during the applicable period and lost their non-vested amounts — they are the ones vested, not the entire remaining workforce.

Worked example. Ridgeline Tool begins 2026 with 250 participants and admits 30 during the year. It lays off 58 employees in a restructuring and 14 others quit voluntarily. Turnover rate = 58 ÷ (250 + 30) = 20.7%. Because the rate meets the 20% presumption, a partial termination is presumed and the 58 laid-off participants must be fully vested. The 14 voluntary quits are excluded from the numerator and are not vested by this rule.

3. Complete Discontinuance of Contributions

This applies to profit-sharing and stock bonus plans, where contributions are discretionary and a sponsor can simply stop without formally terminating the plan. A discontinuance is judged on substance, not the sponsor's stated intent — a plan that receives no employer contributions for several consecutive years is at risk even if the sponsor insists the plan is "just paused." Note that a 401(k) plan receiving only elective deferrals, with the sponsor having stopped all employer contributions, can trigger this rule as to the employer sources.

Normal Retirement Age, Death, and Disability

These three are frequently conflated:

Most modern documents do provide full vesting on death and disability, but the exam tests whether you know it is a document election rather than a statutory mandate. Note also that when a plan's NRA is defined as, say, age 65, a participant who reaches 65 while still employed is 100% vested even with two Years of Service.

Amending the Vesting Schedule: IRC §411(a)(10)

Two protections apply whenever a vesting schedule is amended — in either direction, because even an apparently more generous schedule can be worse for a specific participant at a specific service level.

Protection 1: No Reduction of the Vested Percentage Already Earned

A participant's vested percentage on the day before the amendment is a floor. If Marcus is 60% vested under a 2-to-6 graded schedule and the plan switches to a 3-year cliff, Marcus can never drop below 60%, even if the new schedule would produce a lower figure for his service.

Protection 2: The Three-Year Election

Any participant with at least three Years of Service must be given a written election to have their vested percentage computed under the old schedule. The election period must begin no later than the amendment's adoption date and end no earlier than the latest of:

• 60 days after the amendment is adopted;
• 60 days after the amendment becomes effective; or
• 60 days after the participant is issued written notice of the amendment.

A participant who elects the old schedule keeps it for all of their service, not just pre-amendment service.

Worked example. Beacon Analytics amends from a 2-to-6-year graded schedule to a 3-year cliff, effective January 1, 2026. Danielle has 4 Years of Service and is 60% vested under the graded schedule (Year 4 = 60%). Under the new cliff schedule she would be 100% vested — so the cliff is better for her and she has no reason to elect. Ellis has 2 Years of Service and is 20% vested under the graded schedule. Under the cliff he would be 0% vested. Ellis cannot drop below 20% because of Protection 1, but he has fewer than three Years of Service, so he does not get the Protection 2 election — he simply keeps his 20% floor and then vests 100% at three years under the new cliff.

That contrast — Protection 1 applies to everyone, Protection 2 only at three-plus Years of Service — is the most commonly missed point in this topic.

---

Common ASPPA QKA Exam Traps

• Trap 1 — Counting voluntary quits in the turnover rate. Only employer-initiated severances go in the numerator.
• Trap 2 — Vesting everyone on a partial termination. Only affected participants (those who severed during the period) are vested.
• Trap 3 — Assuming death and disability vesting are statutory. They are document elections; only NRA vesting is statutory.
• Trap 4 — Giving the three-year election to everyone. It goes only to participants with three or more Years of Service.
• Trap 5 — Thinking a "more generous" amendment needs no election. IRC §411(a)(10) is triggered by any change in the schedule, because generosity depends on the individual's service level.
• Trap 6 — Forgetting to allocate suspense-account forfeitures on termination. A plan cannot terminate with unallocated forfeitures.