Partial Plan Termination - Facts to Use to Determine

[Guest Yvonne Bonitatibus]

Our company closed a branch engineering office due to a project that was not getting off the ground. The closure did not have anything to do with downsizing, only canceling a project. With the termination of the project, we also terminated 56 employees. We had a total of 279 employees eligible to participate on the date of the termination. During a recent IRS audit on the 401(k) plan, we were advised that this could constitute a partial plan termination. What numbers should we use to determine if we are over 20%? What other facts should I look at to help make our case? I've been searching on the internet, but am having a difficult time finding any information on what we should look at.

[jaemmons]

If you want some assurance, you could apply to the IRS on Form 5300 for a determination, based upon all of the facts and circumstances of the situation, of whether a partial plan term occurred or not. These occurrences are not cut and dry and the reasons surrounding why these employees were laid off will play an intrical part in the determination. Normally, if the layoffs affected between 20% and 30% of the overall plan participation, the IRS may see this as a partial plan termination, but like I said before, you may want to submit to them for a letter, in case it gets brought up during another audit.

[david rigby]

Prior discussions might be helpful:

http://www.benefitslink.com/boards/index.php?showtopic=7164

[traveler]

I understand that the IRS filed an amicus brief in the Matz v. Household International Tax Reduction Investment Plan case which discusses its position on a partial termination that may have occurred over a number of plan years. Does anyone have a copy of that brief?

[Belgarath]

Agree, there's no specific "bright line" statutory standard. In Halliburton, it was determined that 19.85% of employees being terminated did NOT constitute a partial plan termination. Based upon my experience, 20% seems to be the closest thing to a magic #, and in your situation, you are just a hair over the 20%. Appears the IRS is taking this approach, as I suspect you'll find they generally will. There may be special facts and circumstances that allow a successful argument that even 20% or more will not constitute a partial plan termination, but it may be tough sledding to get the IRS to agree.

[Guest Yvonne Bonitatibus]

As a follow up to my original posting, we have successfully defended ourselves against the partial plan termination, using three defenses. First, we were able to get them to agree that the only numbers in question should be the date of the actual event as opposed to the entire plan year, since all terminations due to the event occurred all on one day. Secondly, we were able to get the total affected employees of 56 down to 52, by stating that 2 were already 100% vested and 2 were offerred to retain their employment, but chose on their own to leave. This brought our number down to under 20%. We then used the Haliburton case to show that anything under 20% did not constitute a partial plan termination unless their was egregious abuse. And we finally provided facts to prove that there was no abuse.