Terminated Participant Fully Vested?

[Dougsbpc]

Small 401(k) Plan is sponsored by an LLP and has 7 participants. One of the 7 terminated October 2013 but has not returned his benefit elections until now. The employer informed us today that they are being acquired by another firm who does not have a plan and does not want a plan.

This will be an asset purchase so the LLP will remain. The two partners will remain but the 4 employees will terminate employment with the LLP. So clearly the 4 employees will be 100% vested as this would be considered a partial plan termination. What about the one employee who terminated in October 2013 long before this happened? Would he need to be made 100% vested even if the plan will be on-going and will not terminate until next year?

Thanks

[Jim Chad]

If he has less than $5,000, you can force him out now. And FWIW I think he would not be 100% vested. What do others think?

[BG5150]

Jim, why wouldn't this person be 100% vested?

There is a side note in the EOB that mentions not vesting a former employee with the dissolution and liqudation of an Employer, but that might be a stretch. Chapter 4, section XII, part A #1.

[ESOP Guy]

I think if he has a balance when the resolution to terminate the plan is effective he is 100% vested. This person simply gets a windfall upon the resolution to terminate the plan. However, if the forms came back before that and he is paid before that he isn't 100% vested would be my thinking.

The only thing that can make this person 100% vested is if someone can make the case he quit because of the partial termination.

[My 2 cents]

If there is a partial termination, how far back does one have to look? Presuming that it cannot be demonstrated that the person was discharged for cause, wouldn't it look like someone who terminated only a few months ago was at least influenced by the conditions that led to the asset sale? Wouldn't a termination within a year of the partial termination be swept in?

[12AX7]

Take a look at this from the IRS:

http://www.irs.gov/Retirement-Plans/Retirement-Plan-FAQs-regarding-Partial-Plan-Termination

Excerpt: An affected employee in a partial termination is generally anyone who left employment for any reason during the plan year in which the partial termination occurred and who still has an account balance under the plan. Some plans wait until an employee has 5 consecutive 1-year breaks in service before he forfeits their nonvested account balance. For these plans, employees who left during the plan year of the partial termination and who have not had 5 consecutive 1-year breaks in service are affected employees. See IRC Section 411(d)(3) and Revenue Ruling 2007-43.

Note: Emphasis is mine.

[Jim Chad]

I was thinking if he is under $5,000 and moved to an auto IRA before the plan termination he would not be 100% vested. otherwise he would be fully vested.