Prorated Benefit Accruals in Plan Terminations

[401 Chaos]

I would appreciate any thoughts on the following. We are preparing to terminate a 401(k) and Profit Sharing Plan that imposes a 1,000 Hour and Last Day requirement in order for participants to receive profit sharing and other benefit accruals. The Plan operates on a calendar plan year and will likely be terminated effective September 30, 2003. Plan will not have any profit sharing amounts this year but will have some forfeiture amounts which are also subject to the 1,000 Hour requirement. Plan essentially provides for immediate eligibility so there are new participants in the Plan that have recently started work and will not have 1,000 Hours upon termination. Some but not all of these new participants would likely have 1,000 Hours by December 31 and thus would share in the regular allocation of forfeitures if the Plan were not terminated. Is it appropriate and/or is there any regulatory authority for prorating the 1,000 Hour requirement for benefit accrual purposes in such a situation so that any participant with say 750 hours at the time of termination (i.e., the plan will have been operated for 9 out of 12 months thus 9/12 X 1000 hours = 750 hours) would receive a forfeiture allocation? Would some different prorated allocation formula be appropriate? Based on a quick glance so far, I note that DOL Reg. § 2530.204-2©(2)© provides that a Plan is not required to take a 12 month period into account for benefit accrual purposes during which an employee has less than 1,000 hours of service. However, given the 100% vesting requirements in plan termination situations, it seems only fair that the 1,000 Hour requirement should some how be prorated but I have not yet found any regulations directly addressing this issue. Thanks in advance for any thoughts.

[david rigby]

Why is this plan being terminated? The facts indicate that it could be amended as a much simpler alternative.

[401 Chaos]

Pax,

The Plan is being terminated because the company is essentially going away. The facts regarding the corporate reorganization are fairly complicated but amendment is not an option in this case. Thanks.

[Blinky the 3-eyed Fish]

Why not amend the plan in conjunction with preparation of the termination documents?

[401 Chaos]

Thanks Blinky. I'm not oppossed to amending the plan as part of the termination but I guess that goes back to my original question. What should such an amendment say--is there a preferred way of calculating such pro-rated allocations? While willing to amend if necessary, the sponsor does not really have a desire to change the plan provisions or to go out of its way to allocate forfeitures to the recent employees without 1,000 hours at the expense of its veteran employees. They simply want to do what is required in the unique situation where the plan is terminated with a short plan year.

By recommending that the Plan be amended, are you and Pax essentially saying there are not any special rules governing or requiring the proration of benefits in a termination situation and thus the plan sponsor is free to simply apply the 1,000 Hour rule as of the termination date? What if there were a termination very early in the Plan Year when nobody had 1,000 Hours and thus nobody would technically qualify for forfeitures. It just seems to me there would be some standard prorating procedure to cover such events but I have not been able to find regulatory authority for that. Thanks.

[Blinky the 3-eyed Fish]

There is no requirement to prorate the hours requirement for a contribution in a short year, termination or not. I thought from your comments you wanted to provide the allocation to those with reduced hours, but I guess not. You just need to be careful about 410(b).

[401 Chaos]

Blinky, thanks for your response, sorry for any confusion in the initial post. I do not think 410(b) will be a problem in this particular situation but we'll be sure to check that out before moving forward.