Partial plan termination - employees fired for dishonesty

[rblum50]

Suppose that you have a plan with 100 participants. All of the participants were hired and became participants on the effective date of the plan. Let's assume 6 year graded vesting. Two years into the plan, everyone is 20% vested. Early in the 3rd year, the employer fires 25 employees for dishonesty. 

Questions:

1) assuming the plan population has stayed at 100, is this a partial year termination? In determining the ratio, since these terminations are employer initiated, it would seem like we would have 25 on top and 100 on the bottom. 

2) If it is a partial termination, must the plan vest the 25 dishonest former employees 100% in their accrued benefits? If yes, it certainly doesn't seem fair.

[ratherbereading]

Maybe the link at the end will help. And to answer #2, yes they would be 100% vested if it really is a true partial plan termination.  Why wouldn't they be?   As a college professor said once about fairness in life, "The fair is on 38th street."  But really, you only have the employer's word saying they were dishonest.  I have a plan who has a participant who was fired for attempted murder and he got a distribution.   https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-partial-plan-termination 

[rblum50]

I guess fairness is in the eye of the beholder. Thanks for the quick response.

[ratherbereading]

Hope it helps!!

[RatherBeGolfing]

48 minutes ago, CEW said:

Maybe the link at the end will help. And to answer #2, yes they would be 100% vested if it really is a true partial plan termination.  Why wouldn't they be?   As a college professor said once about fairness in life, "The fair is on 38th street."  But really, you only have the employer's word saying they were dishonest.  I have a plan who has a participant who was fired for attempted murder and he got a distribution.   https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-partial-plan-termination 

Yep, "fair" is just another four-letter word...

[Larry Starr]

1 hour ago, rblum50 said:

I guess fairness is in the eye of the beholder. Thanks for the quick response.

Fairness is not part of ERISA.A whole bunch of Mass state cops are going to lose their pensions because they cheated the state by saying they worked shifts when they didn't.  A bunch of them just gotten indicted and there are supposedly more coming. Because it is a governmental plan, they CAN lose their pensions.  And that's because the good members of Congress exempted governmental plans from the same rules that we have to live with. Ain't nothin' fair 'bout it!

If "pro" is the opposite "con", what is the opposite of progress?

[Luke Bailey]

Even though the IRS FAQs, or to the best of my recollection any published guidance, do not directly address this issue, if I were confident that they really had committed dishonesty (e.g., that would support termination for cause), I would be tempted to treat them as if they had quit, i.e., not count toward the partial termination 20% threshold. But again, very  dependent on "facts and circumstances."

The rule ultimately is a moral/fairness one, i.e., did the employee, or the employer, deprive the employee of the opportunity to continue to vest. If the former, do not count the individual toward the threshold, if the latter, do count him/her. In this circumstance it would appear the employee in essence quit. But again, you'd want to be really confident of the basis and fairness of the dishonesty determination.

[K2]

I'd be inclined to agree with Luke, assuming that the client had some sort of documentation they could stick in the files.  Whatever that may be.

[Peter Gulia]

To help show that the plan’s administrator acts not in the employer’s self-interest in getting the use of forfeitures but instead to prudently administer the plan, the administrator might ask a good lawyer like Luke Bailey to provide written advice.

[PensionPro]

I would add that the plan sponsor should be prepared to defend its position regarding both the termination for cause and partial plan termination vesting issues before a judge or in a DOL investigation.  On a side note, it is odd that the employer has 25 dishonest employees, that is a big number.

[stephen]

22 hours ago, Larry Starr said:

If "pro" is the opposite "con", what is the opposite of progress?

CONgress

[PensionPro]

Is OP talking about the US Senate?  In that case 25 is a very small number for dishonesty!

[CJ Allen]

Since the IRS did not specifically include "termination for cause" as an exclusion for partial plan termination determination, I would agree with Luke that the argument may be to try to define those workers (or a certain set of those workers) having effectively quit their employment by reason of "cause".  This would be best accomplished by filing Form 5300 and document the facts and circumstances of the "cause" being egregious enough to warrant exclusion.  For example, falsifying timesheets or other items counted toward "Compensation" for benefit purposes would probably hold more weight than showing up 5 minutes late on several occasions.