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Partial Plan Termination

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I administer a plan that clearly had a partial termination in 2001. Therefore, I changed the vesting of all employees who were terminated in 2001 to 100%. Two of the employees have already been rehired in 2002. The question is should the rehires vesting remain at 100% or should their vesting go back to what it would have been had there not been a partial termination?

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First, it is not true that "all employees who were terminated in 2001" should be awarded 100% vesting. A partial termination should give 100% vesting only to "affected participants."

Second, a rehire does not change a participant's vesting percent.

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I have always assumed that vesting is an esclator type of event--once an employee was vested at a certain level of vesting in a plan it could never be reduced even if part of the accrued benefit could be forefeited. I don't think any plan contains a provision allowing a return to a prior vesting schedule after a terminatede employee returns. Of course the IRS regulations assume that termination is final event and do not provide for any return to a vesting schedule if the terminated employee later returns to service. I guess the employer's only recourse is not to hire the employee back if 100% vesting is a big issue which it should not be.

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I would propose that vesting for the rehire be guided by the plan document, that vesting does not "attach" itself to a participant in the same way that years of service do.

In this case, vesting for the rehire is determined based upon years of service. Vesting for the affected participants account balances at that time is increased to 100% based on the partial plan termination.

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PAX - could you clarify what you mean by your response? 1.411(d)-2(B) and -2© seem to imply that only terminated participants (meaning those affected) receive the 100% vested treatment.

The original post on this thread implies the same type of treatment. However, your thread sounds like you are correcting or clarifying the treatment proposed.

It sounds to me like the person posting the question is handling the vesting correctly.

Comments?

Also, upon re-hire the past service would be credited - not necessarily the 100% vested status.

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The original post stated two facts: partial termination, and assignment of 100% vesting to all employees who terminated during the year (emphasis added). I'm not sure those are the same group of participants.

For example, suppose one person terminates on Feb. 1. No partial termination. Then 20 participants terminate (such as a layoff) on November 1 of the same year, resulting in a partial termination and 100% vesting for these 20 participants. Does the Feb. 1 terminee get 100% vesting? The answer (as always) depends on the facts and circumstances, but there is no default that says "yes".

I don't understand what you mean by "...upon re-hire the past service would be credited - not necessarily the 100% vested status."

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I believe that pax is right and that what he is trying to say is that the plan has to 100% vest those who terminate, but only if their termination is connected with the partial plan termination. So if someone terminated in January of 2001, before your plant closing of December of 2001 was even a thought, they do NOT have to be 100% vested. Similarly, someone who terminates from your California plant when your New England plant is closed does not have to be 100% vested becasue they are not an affected participant.

On the rehire issue, I don't have a cite, but feel that someone who is 100% vested as a result of a partial termination would not revert to the vesting schedule upon rehire.

RCK

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RCK-

thank you for the explanation. I had not thought about terminations not related to plant closing, etc. I believe that you are correct in that this group should not be given accelerated vesting since they were not affected.

In terms of the 100% vesting, I will go back and read the regs.

If a person is re-hired, how is it relevant that they received accelerated vesting on a previous plan distribution? It seems that it is the vesting credit (service) that is preserved, not the percent.

Otherwise, you potentially have two people side-by-side where one has two years of service and is fully vested( the term rehire), the other has four years or service and is only 60% vested.

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Upon reviewing the regs, I am still under the impression that a re-hire would have their pre-break service credited NOT the 100% vesting.

This is not the same as a vesting schedule change - in that case they get the better of the schedules. The underlying schedule (which still applies to all other non-terminating participants) has not changed. These participants had their previous distribution determined using a 100% vesting percentage based upon the partial plan termination.

Upon rehire, the prior vesting service is reinstated and determines the current vested percentage based upon the more favorable vesting schedule (the one in the plan when they terminated, or the current schedule - if different).

I do not believe that they automatically come back into the plan as being 100% vested, unless they have enough service to have earned it.

Any other opinions?

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I disagree. I think the employee is 100% vested in the benefit accrued immediately prior to the termination of employment.

It may be that the regular vesting schedule will apply for accruals after the rehire date. I'll have to think about that though.

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PAX-

We are tracking on the same page. I would think that accruals earned AFTER the rehire are on the vesting schedule in effect with pre-break service being counted.

Accruals at the time of termination (partial plan term) are 100% vested. Since we are talking about a DC plan (I think), all that really seems relevant after re-hire is new accruals.

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Perhaps. This issue might require a very close reading of the plan document. For example, if may be that the document should be specific on this point. Not sure. Continued review of IRC 411 and regs is in order.

Have you checked the Gray Book to see if this is addressed?

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Just looking for clarification on partial plan termination.

There was no one event that led to greater than 20% of the participants terminating during the year. However, changes in the industry in question led to such a larger number of terminations spread out throughout the year, and also to acquisition of the company which was merged with another company at 1/1/05. In this case, all actives at that date were given full vesting due to merger provisions, and all terminees during the year were given full vesting due to a determined partial plan termination.

Who actually makes the decision to give partial termination vesting? Can 'change in the industry' be considered an event? Or should the 2004 terminees not have been given vesting?

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We have always looked at all the facts and circumstances, and when we decided to treat it as a partial termination, amended the plan to say that. If we decide that it is NOT a partial termination, then we don't amend, because we are applying the plan as it stands.

I have a great example of how we have done this, but I have to dumb it down a little bit to keep from giving away too much information.

So we bought a company that had let's say 40 locations. We kept 30, and over the course of about a year closed 5 and sold 5. So the people who worked at locations that we kept--no change in vesting. For the ones that we sold or closed, we looked at the close or sale date for each location and 100% vested anyone who was still employed at that location 30 days before the transaction date for that location. We probably could have drawn the line at the transaction date, but decided that the definition of affected participants should be extended to those who, hearing that the location would be closed, terminated before the closing.

So in our case, no single transaction constituted 20%, but the big picture did.

In crosseyedtester's situation, there is a lot of gray area here. Certainly if you want to vest all those people, that is probably not a problem.

RCK

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RCK - thanks for your response. Actually, the client does not seem happy to have all those people vested, particularly those who just entered the plan this year and terminated, but were eligible for an allocation.

They did have an amendment to vest all actives and all terminees who had never requested a distribution of their vested balance. As a result, some 2004 terminees were fully vested, and some from prior to 2004 were fully vested. The partial termination determination resulted in the rest of the 2004 terminees being vested.

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For what it's worth (now that he has retired), I had a discusion with Dick Wickersham on this exact point. His position, which I believe to the IRS position as well, is that once a participant is fully vested, he or she keeps that status.

To put it into perspective, Dick was probably the most knowledgeable person at the IRS regarding ERISA. It isn't terribly well-known, but he also participated in a lot of the legislative drafting sessions of ERISA on behalf of the IRS, along with Bill Lieber (now deceased) and Ira Cohen (now retired).

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I administer a plan that clearly had a partial termination in 2001. Therefore, I changed the vesting of all employees who were terminated in 2001 to 100%. Two of the employees have already been rehired in 2002. The question is should the rehires vesting remain at 100% or should their vesting go back to what it would have been had there not been a partial termination?

Q&A 42 (2009 Enrolled Actuaries Meeting Gray Book): Vesting after Last §420 Transfer

This is almost certainly analogous to a partial termination and the IRS said that the part of the accrued benefit that became fully vested stays that way and any additional accruals are then subjected to the plan's regular vesting rules. My hunch is that the law and this IRS response mimic a spinoff termination scenario (the vested benefit is settled and future accruals are subject to the regular vesting rules).

Edited by chordbender

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