11.3 Participation, Vesting, and Nondiscrimination

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

11.3 Participation, Vesting, and Nondiscrimination

The concepts of participation, vesting, and nondiscrimination as used in the tax law must be understood. Each of these concepts involves specific statutory requirements that must be met before a retirement plan is qualified for the favorable income tax treatment that is essential under the tax law. Participation refers to the time that an employee becomes eligible to participate in the employer's retirement plan. Any employee age 21 with one year of service must be a participant in the plan.²⁸ To avoid including temporary or part-time employees, anyone who works 1,000 hours or less per year is not required to be a participant in the plan.²⁹ Participation can be extended to two years if desired, but to do so requires an immediate 100% vesting schedule for all participants.³⁰

Even though an employee is a participant in a plan, the employee does not actually own anything until the contributions of the employer have "vested." Vesting for a defined contribution plan occurs under one of three schedules:³¹

1. "Cliff"...