Employer is reducing staff by about 13%. He wants to 100% vest those leaving. Can the employer be more generous than the 20% rule? Could the document define a partial termination as a 10% reduction?

[This message has been edited by Richard Anderson (edited 06-02-2000).]

In Halliburton Co. v. Commr., 100 TC 216 (1993), the Tax Court held that, absent "egregious abuse" by the employer, a reduction of less than 20% was not sufficient to result in a partial plan termination. The Second Circuit further refined this semi-bright line rule when it held that the 20% reduction test is applied only to affected participants who were not fully vested by operation of the plan. Weil v. Retirement Plan Administrative Committee of the Terson Co., 913 F.2d 1045 (2d Cir. 1995). Also, keep in mind that in terms of a vertical partial plan termination, the 20% test is a test of the reduction in the percentage of plan participation by non-fully vested participants caused by a corporate event; not merely a percentage reduction in staff.

Presumably, the plan presently maintains a uniform vesting schedule. Therefore, accelerating vesting on a selective basis in circumstances that don't rise to the level of a partial plan termination requires a plan amendment. If the nonvested portions of the terminated employees' account balances ultimately form a forfeiture suspense account that benefits the nonterminating employees, the accelerated vesting proposal has a zero-sum effect, i.e. what you give the terminated employees by accelerating vesting you take away from the forfeiture suspense account. The potential stumbling blocks here are

1. Treas. Reg. Sec. 1.401(a)(4)-4, which prohibits the discriminatory availability of benefits, rights and features; and

2. Treas. Reg. Sec. 1.401(a)(4)-5, which provides rules for determining whether a plan amendment or series of plan amendments has the effect of discriminating in favor of HCEs.

It shouldn't be too hard to figure out who the winners and losers are in this situation, apply the appropriate test and see if the amendment creates a nondiscrimination problem for the plan.

Even if the amendment doesn't create a compliance problem, if the employer adopted a standardized or nonstandardized prototype plan, this is probably the sort of amendment that will result in converting the plan to an individually drafted plan, which will deprive the plan of continued reliance on the existing determination or opinion letter, require a new determination letter request and a complete amendment and restatement. It will also almost certainly result in higher annual plan administration fees.

[This message has been edited by PJK (edited 06-02-2000).]

Generally, a plan does not have to define partial termination. I'm not sure that I agree with PJK's comment that the 20% rule of thumb looks only at the "non-fully vested participants". I believe the reference should be to "participants". Of course, the result is only to affect the vesting status of "affected participants". BTW, a plan could award full vesting by amendment where a partial termination may be suspected, thus possibly avoiding any debate about whether there was a partial termination.

The 20% "rule" was a guideline first set out in the plan termination worksheets used by the IRS. The percentage referred to the involuntary terminees, not the number of affected participants. I believe there is a court case (Texaco, I think) in which the triggering percentage was as low as 6%. The IRS will provide a letter ruling on partial terminations if you think it would be advisable, but I would think it easiest, cheaper and more timely just to do some kind of amendment.

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I don’t think so, after Revenue Ruling 2007-43 anyway. See that. A 20% presumption is used unless regular turnover of 20%+ is routine.

Notes:
The testing period is generally the plan year but can be something else if the event is longer.

Denominator: participants who were employees (include those who entered during the plan year as made clear by "employees who became participants during the applicable period" in Revenue Ruling 2007-43).

Numerator: Participating employees who left, excluding nonparticipants, former employees, those who terminated due to death or disability, those who retired after NRD, and those who were rehired "soon" (see Halliburton 1993 which is still referenced & I believe still decent guidance). "Affected" employees are employer-initiated terminations but "an employee's severance from employment is employer-initiated even if caused by an event outside of the employer's control, such as severance due to depressed economic conditions."