Partial termination in a DC plan

[alexa]

We have had furloughs during 2001 and early part of 2002 and may have another group of furloughs coming.We rehired some of the furloughed employees

What is a participant for partial termination purposes? Does it include retirees and term vested?

How does the calculation work in determining the %? We have had approx 9K furloughed out of a 46K active workforce during 2001. Would 9K be considered a significant #?

When I take the # of furloughs during 2001, factoring in the rehired furloughs and divide by beginning of year active participant count for 1 of our largest populated DC plans (we have 5), I get just shy of 20%. If I am allowed to add back in total participants at beginning of year, I will of course get a lower %.

Do I need to add in upcoming furloughs to this determination? We don't know yet how many

We have a very generous vesting schedule, 100% after 2 years so it would not be a significant cost item to 100% vest the employer accounts just more of an administrative issue.

If anyone has had to go through this analysis , I'd appreciate you input

[RTK]

alexa48

You could write many pages on partial termination issues. Let me give a few thoughts to get you started.

Regarding who is a participant, I believe only employer initiated terminations need to be taken into account. Thus, I have excluded quits, retirements (voluntary only), deaths, disabled, and discharge for cause in partial termination calculation. The issue of vested participants is not as clear. The IRS says yes. Some courts have said yes. Recently, the 7th circuit said no in Matz v. Household International Tax Reduction Investment Plan. 265 F.3d 572. An early 7th circuit Matz decision discusses the other cases on the vested participant issue. 227 F.3d 971.

Regarding the signficant #, although the IRS guidance talks about "signficant percentage" and "signficant number," I have had success in IRS applications in focusing on signficant percentage only. A number of courts seem to have taken the same approach. One case is Halliburton in the Tax Court. 100 T.C. 15 (1993)

I have done my percentage calculations by putting the number of employer initiated terminations during the plan year in the numerator and putting the number of participants at the beginning of the plan year plus the number of new participants added during the plan year in the denominator. This assumes the use of a single plan year for the partial termination calculation. Note that the Halliburton court permitted rehired employees to be excluded.

Regarding adding in upcoming furloughs, you should do so to plan for the issue. This really raises the issue of the period over which to determine a partial termination - i.e., should multiple plan years be aggregated. This was addressed by the Matz and Halliburton courts. Note that I believe plan years should be aggregated only if related to some corporate event that continues for more than one plan year.

Hope this helps.

[alexa]

Yes, this has been very helpful

The # of participants at beginning of year, do you include terminated vested and retirees or just include active participants

[RTK]

For the # at the beginning of the year, I have used active participants (and excluded retirees and term vested) - the idea being to compare the number of active participants terminated during the year by employer initiated action to the the total number of active participants for the year (which is equal to the number of active participants at the beginning of the year plus the number of active participants added during the plan year).