A company has a profit sharing plan and added a 401k plan. At the beginning of the plan year there were 12 active participants and then 3 employees were layed off this month. Our plan administrator has informed us that this much of a reduction may have caused a partial termination of the plan causing us to have to vest these 3 employees at 100% whereas they would not have been vested at that level. They also informed us that we were on the bubble at a more than 20% reduction in active participants and that we may only need an opinion that the plan is ok. Does anyone have knowledge of this situation?

A partial termination is based upon facts and circumstances. Even if the percentage of laid off workers is 25%, you need to look at surrounding circumstances of the layoffs. Did the employer lay off occur due to economic reasons? I have read past court cases which suggested that if layoffs were done in good faith, did not adversely impact the financial "health" of the plan, did not discriminate in favor of hce's, then a partial termination did not occur. I have seen the 20% used as a guideline for whether or not to research the potential of a partial termination, but that is all for which it is to be used - a guideline. Changes in employee demographics with small employers happen a lot of times for financial reasons, but you should still gather more facts surrounding its cause and if the plan administrator wants a more concrete opinion, I would suggest filing a form 5310 with the IRS.

I partially agree with those comments. The 20% "trigger" may be a guideline, but it has acquired more emphasis over the years. My experience is that 3/12 = 25%, greater than 20%, will lead to a partial termination.



However, the comment about "facts and circumstances" is always valid. For example, if the layoffs occurred during the same year but at different time, it might be possible to assert that they should not be aggregated. Not necessarily.



There have been many discussion threads about this topic. I suggest using the Search feature on this site. Try using "partial termination" as the keywords.