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Who are the participants "affected" by partial termination


Luke Bailey

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Rev. Rul. 2007-43 seems to me to provide some reasonable clarity for determining when a partial termination has occurred. You divide the number of "employer initiated" active participant terminations during the period in question (e.g., plan year) by the number of active participants you had at the beginning of the plan year, and, depending on how much the resulting percentage is over or under 20%, you determine whether you had a partial termination. 20% or over, you probably did, under 20%, you may not have, and other facts and circumstances can also be brought into the analysis if you're close. All this seems reasonable, to me, and as far as I can tell is rationally related to the case law.

But Rev. Rul. 2007-43 also seems to assume, as far as I can tell without any basis in regulations or case law, and possibly, in my opinion, contrary to the plain meaning of the statute (IRC sec. 411(d)(3)), to say that if you determine you had a partial termination, then everyone who terminated without full vesting during the period in question, including voluntary terminations, is deemed to have been "affected" by the partial termination and therefore is required to be fully vested.

Below is the relevant paragraph from Rev. Rul. 2077-43:

"If a partial termination occurs on account of turnover during an applicable period, all participating employees who had a severance from employment during the period must be fully vested in their accrued benefits, to the extent funded on that date, or in the amounts credited to their accounts."

Does anyone besides me think that this may be baseless and lacking common sense? Am I missing something that makes Rev. Rul. 2007-43's conclusion regarding the definition of "affected participant" correct?

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Luke - I believe your understanding to be correct.  I filed under a VCP some years back on this very issue where there was a series of employee reductions over several years resulting in a partial termination.  We broke out those that were employer-initiated to come up with the percentage.  It was above 20%.  We then fully vested only those affected participants. The IRS disagreed and said we needed to fully vest both those that were voluntarily and involuntarily terminated over this time period.  I believe I even found and provided informal IRS guidance stating that we only had to vest those that were involuntarily terminated.  One of their arguments was that when you have large scale reductions it’s difficult to determine those that were voluntary as they may have been taking preemptive action for what they believed to be the inevitable termination.  That was my experience.  

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A client received an IRS "compliance check" notice a few years ago indicating the participant count change from the beginning of the year to the end of the year on the Form 5500 indicated a partial termination may have occurred.  The IRS letter invited the client to explain why there were terminated participants who were not fully vested at year end.  A response letter was written to indicate a large majority of these terminated participants were actually let go for cause (attendance, in jail, failed drug test, etc.) which is why a partial termination should not be imposed on the plan.  The reason for termination of each participant was in fact documented in every single personnel file and was pulled from storage by HR to determine this information.  The IRS agreed in this case and no further action was required (meaning no partial termination was found to occur that year and no one fully vested due to termination).  Interestingly enough, there was in fact an employer initiated layoff that year but nowhere near the 20% threshhold required to fully vest in a partial termination.

Just wanted to mention that the IRS has been known to take a reasonable stance if there is back up for termination for cause, even if employer initiated.

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2 hours ago, Madison71 said:

One of their arguments was that when you have large scale reductions it’s difficult to determine those that were voluntary as they may have been taking preemptive action for what they believed to be the inevitable termination.

That is spot-on Madison. 

 

1 hour ago, Pension Panda said:

Just wanted to mention that the IRS has been known to take a reasonable stance if there is back up for termination for cause, even if employer initiated.

Agreed. The key here is that the employer must maintain complete and accurate records and has good internal controls. Lack of controls and records almost certainly guarantees most favorable resolution for the employee. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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I agree with all of these very helpful comments as to (a) what IRS's position is on the issue, and specifically that the conclusion of Rev. Rul. 2007-43 has found its way virtually verbatim into the Service Center compliance check letters that it sends out, and (b) IRS's most likely rationale for the position  (i.e., that it's hard to tell whether someone who is classified as a "quit" was really voluntary if the company was going through a RIF). Having said that, and assuming you could determine with reasonable certainty that some employees had quit or were discharged for cause, I don't see the basis for concluding that those folks were "affected" by the partial termination.

Note that if I understand you correctly, Pension Panda, you were able to demonstrate to IRS that there was such a large number of for cause terminations that the employer did not have a partial termination. I will probably not be able to do that in the case I have, since as I understand it the employer in quesstion did do a RIF. They 100% vested everyone in the RIF, I believe, so all I want to do is not have to 100% vest retroactively the folks who were not in the RIF, but who quit or were discharged for cause.

Thanks to all.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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A client was audited in 2010 time frame with a RIF and we took the position that only those employer-initiated terminees were fully vested and IRS agreed. That may be an outlier, but it never hurts to mention. The other issue was for me not to connect or attribute 3 plan years for several RIFs as there was an episodic but continuous

 

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In these set of facts, a RIF occurred but to only approximately 9% of the beginning number of employees.  This was a large plan and more than half the terminations that year were "for cause" which was common in this client's industry.  As less than 10% of the plan participants were terminated through RIF employer initiation, the IRS agreed no partial termination was deemed to have occurred and therefore no participants were required to be fully vested under partial termination rules.

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For anyone interested in looking at case law which contradicts this IRS position (a position that I believe is contrary to the statute), I found a Baker Botts article with a footnote citing Borst v. Chevron 36 F3d 1308, Borda v. Hardy, Lewis Pollard & Page, 138 F3d 1062, and Artz v. Fairbanks, 112 F.R.D. 59.

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Thanks, Linda. That could be very useful if it comes to that. Hoping our facts are good enough will not have to challenge IRS's position.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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