Partical plan termination, small plans

[Stevo-PDX]

A 401(k)/Match plan has 28 employees. The employer terminates 16 employees in the year, most are involuntary and in the last month.

12 total participants are active or termed have match balances. (5 x 100% vested & termed, 5 x partially vested, & termed, 2 x active).

Evaluating the plan on simple math, the employer terminated 57% of the employees.

Is there any deminimus amount of employees/participants that would allow the employer to not be considered as exceeding the 20% threshold of terminations for a partial plan termination?

The forfeitures may not be significant enough to warrant getting a FDL.

[mbozek]

What is the amount of the forfeitures in the accounts of the terminated employees? If it is small why not just vest them 100%. It is not worth the trouble to do the research to determine if there is a partial termination for a few thousand $ in forfeitures.

[MWeddell]

Deciding whether a partial termination has occurred is as clear as mud. The answer may vary depending on whether one enforces the IRS de facto standard or the courts' de facto standard (and if the court standard is used, in which of the federal circuits is your client located).

All authorities agree that the most important factor is the reduction percentage, but calculating that percentage is unclear: one considers only plan participants, not all employees, although one recent court said that one ignores fully vested participants from the calculation. Also, the IRS and courts differ on the burden of proof for ignoring voluntary terminations from the calculation. Occasionally a court says that a "significant number" of reductions affects whether there is a partial termination, but usually they focus on whether there is a "significant percentage." Hence, to (finally) answer your question, I'd say that no, the fact that you're dealing with a small employer won't matter -- the percentage is high.

Tell your client (i) either fully vest affected participants (or all participants) or (ii) client should check with its legal counsel to assess the risk if the client wants to try to not declare that there's been a partial termination.

[david rigby]

I would say definitely check with legal counsel.

At a 57% measurement, there is not much doubt about a partial termination, but you may wish to review earlier discussion threads here on this topic. Try the search feature.