Private Pensions:

Impact of Vesting and Minimum Benefit and Contribution Rules in Top-Heavy Plans

HRD-90-4BR: Published: Oct 23, 1989. Publicly Released: Oct 23, 1989.

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Pursuant to a congressional request, GAO provided information about tax reform legislation's effects on the vesting status of participants in top-heavy pension plans, in which more than 60 percent of benefits or contributions go to company owners or other key employees.

GAO found that tax reform legislation established a maximum 3- to 6-year waiting period for vesting in top-heavy pension plans and a maximum 5- to 7-year waiting period for vesting in plans that were not top-heavy. GAO also found that analysis of 26,000 top-heavy plans with about 142,000 participants indicated that: (1) application of a 5-year cliff vesting schedule increased the percentage of non-vested participants from 13 percent to 40 percent; (2) application of a 3- to 7-year graded vesting schedule increased the proportion of non-vested participants from 13 percent to about 23 percent; (3) application of either of those vesting schedules disproportionally affected male employees; (4) participants with short service appeared more likely than those with longer service to have total accrued benefits equal to the defined benefit minimums; (5) 58 percent of plans used benefit formulas that provided non-key participants accrued benefits that were greater than the minimum; (6) about 33 percent of non-key participants with fewer than 3 years of service had accrued benefits that were greater than the minimum, compared with about 66 percent of those with 3 or 4 years of service and about 91 percent of those with 5 or more years of service; (7) employers contributed more than required in 61 percent of defined contribution plans; and (8) about 85 percent of non-key participants in defined contribution plans received contributions above the minimum.

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