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Partial Termination?


Guest benman

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A client sponsors a 457 plan. The State passes legislation splitting the client into two separate entities. One is our client. The other is a new entity that sets up a similar plan. For unknown reasons, this was not handled as a spin-off. Participants in the new plan (who were former employees of our client, and have balances in our client's plan) want to rollover their balances into their new plan. The question is: should we rollover their vested balances, or treat the state legislation that created the new entity as a partial termination of our client's plan, such that the affected employees are 100% vested?

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You'd have to check the legislation to see if it affects the decision. However, state law permitting, your best option would seem to be a direct transfer (not a rollover, since that cannot occur without a distributable event) of all account balances from the old plan to the new one.

The events should not (barring contrary state law) require full vesting. Even for a 401(a) plan, that is required only on a termination of a plan (i.e., when the employees lose the right to have future vesting service applied), not just when contributions to the plan cease.

On the other hand, if this is a 457(B) plan, it would be unusual to have anything less than full vesting in any event. Are there some employees who are only partially vested? How did this arise?

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The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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My mistake. I'm a little green dealing with plans sponsored by Governmental entities, and I need to be more careful in the terminology I throw around. What we have is a money purchase plan with mandatory and voluntary employee contributions and an employer component. It is the employer component that is partially vested.

It is my understanding that 100% vesting is also required for affected employees in partial termination situations. The majority of our client's employees (probably more than 80%) no longer work for our client, but are employed by the new entity that was created by the State. Wouldn't this be considered a distributable event?

Our client is continuing to maintain its plan, and it seems unfair to the former employees that they lose their unvested balances due to state action. The result seems to unfairly enrich our client and/or their participants, at the expense of the former employees.

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I've moved this to the Governmental Plans board, because it appears that it deals with a governmental plan that is not a 457 plan.

Whether the situation represents a partial termination (or complete discontinuance of contributions, which would also require full vesting) depends on whether the employees can continue to receive contributions and accrue vesting credit with the new employer. One way of dealing with the situation is merely to provide that all account balances will be transferred to the new employer's plan (assuming that both the old and new plans are 401(a) plans), and that the new employer will credit service in determining vesting with respect to both the money transferred over and the new money. This avoids either (a) a situation in which the old employer has to figure out what service the employees have with the new employer, when the old employer may not have access to the new employer's payroll records, or (B) a partial termination, requiring full vesting.

Alternatively, you could treat the switch to the new employer as having terminated the employees' service with the old employer. That would require full vesting of account balances. You could also provide that employees could receive a distribution of their account balances at that time. In that instance, they would be able to roll over the money to the new employer's plan (if it permitted such rollovers) or to an IRA.

Again, you would need to consult state law to determine whether it mandated and/or permitted either of these options.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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"...Alternatively, you could treat the switch to the new employer as having terminated the employees' service with the old employer. That would require full vesting of account balances."

Why?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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To the extent that they are treating the situation as a spin-off of a portion of the plan, followed by a termination of the plan covering the transferred employees, pre-ERISA section 401(a)(7), applicable to governmental plans under Code section section 411(e)(2), requires full vesting of all funded benefits upon plan termination.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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  • 6 years later...
Guest ebailey

Partial Termination Question:

In response to your comment below " One way of dealing with the situation is merely to provide that all account balances will be transferred to the new employer's plan (assuming that both the old and new plans are 401(a) plans), and that the new employer will credit service in determining vesting with respect to both the money transferred over and the new money. This avoids either (a) a situation in which the old employer has to figure out what service the employees have with the new employer, when the old employer may not have access to the new employer's payroll records, or (B) a partial termination, requiring full vesting."

We have employees in a governmental DC plan that are transfering their account balances to another governmental DB pension plan (same governmental unit). The transfer is voluntary. All employees are fully vested in their contributions but not all employees are vested in the employer contributions. The service credit of employees in the DB plan will be based on the account balances from the DC plan that are transfered over. We would like to avoid a "partial termination" and avoid the pre-ERISA 401(a)(7) full vesting issues. We belive if a large enough percentage of employees transfer their balances that it may be considered a partial termination; however, we are not sure of the implications of this being a voluntary transfer. Does the fact that this is a voluntary transfer preclude a "partial termintation" finding?

I've moved this to the Governmental Plans board, because it appears that it deals with a governmental plan that is not a 457 plan.

Whether the situation represents a partial termination (or complete discontinuance of contributions, which would also require full vesting) depends on whether the employees can continue to receive contributions and accrue vesting credit with the new employer.

Alternatively, you could treat the switch to the new employer as having terminated the employees' service with the old employer. That would require full vesting of account balances. You could also provide that employees could receive a distribution of their account balances at that time. In that instance, they would be able to roll over the money to the new employer's plan (if it permitted such rollovers) or to an IRA.

Again, you would need to consult state law to determine whether it mandated and/or permitted either of these options.

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