Partial Termination

[david rigby]

Probably an easy question, but I cannot find an answer. If a plan sponsor is a member of a controlled group, is a possible partial termination evaluated on a plan basis or a controlled group basis? Any cites? (I have already searched the Message Boards for an answer.)

Just for reference and not on point, the only Q&A in the Gray Book related to partial terminations is Question 1995 - 22:

Multiple Employer Plans -- Terminations and Partial Terminations

Two corporations form an IRC Section 413© plan. Corp A has about 2000 employees participating; Corp B about 100. The regulations seem to say that, at least for termination and partial termination purposes, all employees are to be treated as if employed by one employer. Employer B goes out of business. Is there a partial (or full) termination? Must all employees of B be 100% vested?

RESPONSE:

For termination and partial termination purposes, all employees are treated as if employed by one employer. Thus, given the small percentage of total employees affected by B's going out of business, it is unlikely that there would be a partial termination requiring full vesting of B's employees.

[MGB]

All of the language in court cases, Rev. Ruls., etc. refer to the plan, not the employer.

The Halliburton case (Halliburton Co. v Commissioner, 100 TC 216, 237 (1993)) addressed it specifically by stating that anyone without an accrued benefit under the plan is excluded in the counts of participants versus terminations. Although this was in the context of those that had not met the eligibility requirements, it would also apply to noneligible employees.

Note, too, the Gray Book was talking about multiple employers within one plan.

For a very complete review of court cases, etc. concerning partial terminations, I recommend "Analyzing Vertical Partial Terminations," by Michael J. Collins, Esq. in the Summer 2001, Journal of Pension Planning & Compliance (Panel Publ.).

[jaemmons]

I have always taken the approach that a review of a potential partial termination is done on an employer basis. Since a controlled group of companies is considered to be one employer for all plan puposes, should a drastic change in the underlying demographics of the controlled group occur (e.g.- sale of a brother sister arm/subsidiary, layoffs within a department of one of the aforementioned, etc.) it is looked at in comparison to the entire employee group of all members within the controlled group.

In a multiple employer arrangement, I have done the same, since generally, most sponsoring employers are unrelated entities and are treated as individual employers for most of the plan's administration.

[MGB]

jaemmons,

Consider a controlled group with 10,000 employees and multiple plans. 200 employees are in one of the plans and they lay off 150 of those employees.

Your description of looking at the employer results in a comparison of the 150 laid off to 10,000 and no partial termination.

I say it should be on a plan basis, not an employer basis. 150 of the 200 were terminated, making it a partial termination.

The fact that there are other employees within the controlled group that are not covered by the plan shouldn't enter into the analysis.

[jaemmons]

MGB,

My statement was based upon the members of the controlled group participating in the same plan. If they individually sponsor their own "stand alone" plan, then I would agree with your position. Sorry for the lack of detail in my reply.

[david rigby]

The comments from MGB and jaemmons are pretty much what I was expecting: specifically, that all references (including the statute) are to a plan, rather than to the employer. Thank you both for your help.

[david rigby]

Now I would like a variation, similar to MGB's example but with a twist.

Company A has 100 employees, 80 of which are active participants in the plan. But A is a wholly owned subsidiary of Company B, which has 10,000 employees and also has its own plan(s). At a single date, the following actions occur:

- Plan A is frozen, pending formal merger into Plan B later,

- employees in Company A begin participation in Plan B,

- employees of A were previously paid directly by A but are now paid directly by B, but were in the same controlled group at all times.

A week after this action, 20 employees of A are laid off. Assume all are participants in Plan A.

(1) If Plan A were evaluated on its own, then this would probably be a partial termination (20/80 = 25%), but is this the correct test?

(2) Is the answer different if we state that 2 months prior (that is, while still actively participating in Plan A), the 20 laid off employees were told of their pending layoff?

(3) Is the answer different if the number laid off is 15, followed by 5 more one month later? (Opinion, I don't think this changes anything.)

[jaemmons]

As we have discussed earlier, the partial term is evaluated on a plan basis. However, if a demographic change occurs which impacts the benefits of a plan merging into another plan (e.g-mass layoffs of seller company) you may have a partial term with respect to the merged plan benefits of the seller company, which now makes it an individual member evaluation. This kind of contradicts the "plan" basis, but here me out:

You have two plans merging due to an acquisition or merger of two companies. Part of the purchase agreement is that a certain division of the seller would close down as of the effective date of merger. Both plans are not going to fully vest the employees and decide to continue vesting credit recognizing predecessor service. Since the layoffs were due to the companies merging, you need to look at the impact of the layoffs before the merger occurred to see if a partial term has occurred with respect to the benefits in the seller's plan.

A facts and circumstances overview is what the IRS uses to determined whether or not a partial term has occurred and, although I may be wrong, I would believe that if you presented your facts to them on a Form 5310 submission they would break the selling entity's benefits from their previous plan apart to form their opinion.

[DPL]

I assume that if a Company shuts a plant or shuts down one division or line of business, resulting in an overall Plan turnover rate that exceeds 20%, then "affected participants" who become fully vested include not just those in the shuttered plant or division, but also other participants who terminated employment during the period in which a partial termination occured. Right?

[david rigby]

Maybe. It's (always) a facts and circumstances test.

First, the IRS presumes all terminations during the appropriate time frame are subject to the deemed vesting.

Second, the plan sponsor has the ability to document other facts that might exclude some of those terminations. For example, an employee who died.

[Guest Sieve]

Of course, dead employees usually become fully vested, in any event.

If you can show that some who left did so for other reasons--spouse changed jobs, left to start a business, left to care for children, fired for incompetence, etc.--then they should not count in your 20% for partial termination purposes. But, as stated, the onus is on you to demonstrate those facts/circumstances. You probably will also have to show that the voluntary quits were not people who simply saw the handwriting on the wall and quit knowing that it was just a matter of time before they were involuntarily terminated.

[ESOP Guy]

I assume that if a Company shuts a plant or shuts down one division or line of business, resulting in an overall Plan turnover rate that exceeds 20%, then "affected participants" who become fully vested include not just those in the shuttered plant or division, but also other participants who terminated employment during the period in which a partial termination occured. Right?

For your question the only guidence out there are court cases in my opinion. You will find courts that have allowed employers to do what Sieve said, others seem a little more strict.

Safe would be to make everyone 100% vested in the timeframe in question.

If you want to do something else I think it pays to hire the lawyer you might need to use to defend the plan in court. If that is too costly in releationship to the number of people in question just vest the people, that seems like cheap insurance.

[david rigby]

... just vest the people, that seems like cheap insurance.

True. Often this is cheaper than anything else.