Partial Plan termination when all but owner is left

[Guest EPS]

I have a profit sharing plan. The census shows that pretty much all the eligible participants have been terminated in the same year. All of them are not fully vested. Most of them are only 20% vested.

Is this considered a partial plan termination, where everyone is automatically 100% vested?

Even if the participants voluntarily terminated, is it not considered a deemed partial plan termination because all the forfeitures will be allocated to the owner?

If it is considred a partial termination, how does this effect future plan years.

I could use some infput on this issue. Thanks!

[david rigby]

Every discussion of a partial termination should include a review of "facts and circumstances." Some prior discussions here might be useful, such as

http://benefitslink.com/boards/index.php?showtopic=14055

http://benefitslink.com/boards/index.php?showtopic=10187

Based on the limits facts presented, my guess is that the plan sponsor should probably be willing to treat this as a partial termination. However, that will require close examination of your term "voluntarily".

In general, the result of a partial termination is to award 100% vesting to "affected participants." This usually does not have any bearing on the plan's operation in the next plan year, except that it may trigger additional payouts, hence affect cash flow.

[Belgarath]

Others may disagree, but I've always understood that if the terminations were in fact VOLUNTARY, then no PPT occurs. I saw a reference to a court case, Anderson v. Emergency Medicine Associates, that reached this conclusion. But your client would have to prove this to the satisfaction of the IRS that these terminations were in fact voluntary. That might be difficult, becuase there is generally some form of employer initiated action that causes such a mass defection.

[Guest Libby]

I believe there is also an old revenue ruling which says that where everything is forfeited to the remaining participants who are all owners, that you have a discriminatory and disqualified plan. But this was a plan that was terminated, and it sounds like your plan will be ongoing.

[david rigby]

I agree with Belgarath RE his comment about involuntary termination. To be considered a partial termination, the termination of participation in the plan must be involuntary, either by plan amendment or other employer-initiated action (such as, firing, layoff, or plant closing). However, the IRS presumes all terminations are involuntary unless the employer shows otherwise.

In the original post, there is the phrase "have been terminated". Don't know what that means, but it certainly can convey an involuntary termination.

[Kirk Maldonado]

My recollection is that some courts have taken into account voluntary terminations as well. The rationale is, if the person realizes that they are going to get laid off in the next week, they shouldn't be penalized for quitting one week before they were going to be discharged anyway.

However, that unfortunately could bring into the equation normal turnover.