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austin3515

PArtial Plan Termination Rules

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So lots of partial plan terminations imminent or in progress,.  We all agree that in this scenario, assuming it is a calendar year plan, anyone who terminates at any time in 2020 (and for any reason) must become 100% vested.  Is that correct? 

Seems like now would be a good time for someone to challenge the IRS to repeal that dumb interpretation.  Even if they solve the problem it will be too late.

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Maybe...   I've had to do a couple of these calcs over the last couple of years.  From reading the EOB, you take into consideration the involuntary and voluntary terminations and start to do the calculations.  I'm leaving out other details...….

Generally speaking, you look at the plan year as a whole.  It may be a little early in the year to determine if really a partial plan term occurred.  They may rehire back the terminated and squeak by on the percentage.

So yes, they might get 100% vested, but at what date?  I don't want you paying out at 100% and have that bite you in the end.

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Why is it dumb? Because you think the IRS interpreted the rule incorrectly? Or because you think the rule itself is dumb? Or hard to efficiently / effectively manage? Especially when there are mid-year distributions? Just trying to understand. 

I think allowing folks to keep more of the money isn't really a bad thing in these uncertain times....

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2 hours ago, justanotheradmin said:

I think allowing folks to keep more of the money isn't really a bad thing in these uncertain times....

No offense but that is of course easy to say when its not your money.  The business that just laid off 35% of its work force needs every penny to leave the lights on.

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5 hours ago, Mr Bagwell said:

Maybe...   I've had to do a couple of these calcs over the last couple of years.  From reading the EOB, you take into consideration the involuntary and voluntary terminations and start to do the calculations.  I'm leaving out other details...….

Generally speaking, you look at the plan year as a whole.  It may be a little early in the year to determine if really a partial plan term occurred.  They may rehire back the terminated and squeak by on the percentage.

So yes, they might get 100% vested, but at what date?  I don't want you paying out at 100% and have that bite you in the end.

To be more clear,  you only take into account involutnatry terminations when determining if there was a partial term.  Then you fully vest anyone who terminates for any reason (thats the dumb part; the guy who quit for another job gets a windfall).

And because they have already exceeded the 20% threshhold, in this case by a wide margin, there is no way it could decrease from there.  

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I am with austin here on the rule isn't a very good rule.  I am just not sure what to do about it.

 

I have seen cases were a company sold a division late in the year and those people exceeded 20% of the employees.  They were terminated.  I can see why they are made 100%.  But the rule would have someone who terminated months before that worked in another division become 100% vested. 

Even a person terminated for cause is made 100% vested.  

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The idea that 20% turnover in a period sets up a rebuttable presumption that a partial termination happened is not a rule or regulation.  https://www.irs.gov/retirement-plans/partial-termination-of-plan

 

Without joining the debate about the IRS’s interpretation, I’ll observe this:  While a careful practitioner might consider reasoning explained in subregulatory guidance and in court decisions, one may render advice that interprets the statute and the rule using different reasoning.

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Personally I would not recommend getting the least bit aggressive on these rules.  The client does not have write a check.  And the costs of correcting if the Ira disagrees With you would be very costly if you used those forfeitures...

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If my client asks for my advice, I can explain everything.  That might include warning an administrator that its interests, fiduciary and personal, might conflict with the employer’s interests.  And it might include inviting my client to evaluate soberly whether it has the resources and the appetite to fight a government agency.  Everything is fact-sensitive.  Some clients are comfortable with decision-making, including risk decisions.  Others ask “what would you decide?”  Even with them, I’m mindful that the client enjoys and suffers the consequences.

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We had this situation a year or two ago.  Sponsor closed one site, so partial termination and full vesting resulted... no disagreement.  But this IRS "Issue Snapshot" was troubling... https://www.irs.gov/retirement-plans/partial-termination-of-plan

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Analysis

IRC section 411(d)(3) specifies that a plan will not be qualified unless it provides that, upon its partial termination, the rights of all “affected employees” to benefits accrued to the date of such partial termination, to the extent funded on that date, or the amounts credited to their accounts, are nonforfeitable.

The facts and circumstances determine whether or not a partial termination occurred under IRC section 411(d)(3). If a partial termination occurs, all participating employees who had a severance from employment during the applicable period must be fully vested in their account balance or their accrued benefit, to the extent funded.

Under Rev. Rul. 2007-43, the IRS established that a 20% or greater turnover rate in the applicable period creates a rebuttable presumption that a partial termination occurred.

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and...

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Affected Employee

IRC section 411(d)(3) and Treas. Reg. section 1.411(d)-2(a) require that upon a plan’s termination or partial termination the benefits accrued to the date of such termination or partial termination, to the extent funded, are fully vested for each affected employee. “Affected employee” is not defined in the Code or Regulations.

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Sponsor said participants who terminated earlier in the year, without knowing of the site closing or being affected by the closing, will not be fully vested.  We gave him all of this info, but he was adamant... rule is "dumb", and he'll fight it if he has to.

 

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