Partial termination and plan termination and vesting

[AndyH]

Company with underfunded DB plan (subject to PBGC if that matters) experiences financial distress in 2003 and freezes benefits. Withing a month or two of the freeze date, both before and after, 40% of the work force is laid off. Many are less then 100% vested.

Plan is to be terminated in effective in 2004, about 11 months after the freeze. Sponsor will come up with the shortfall needed to terminate in a standard termination.

Question: Do people laid off in 2003 who clearly would comprise a partial termination need to be fully vested as part of the 2004 plan termination, even though the plan was not sufficiently funded when the layoffs occurred?

How is "to the extent funded" interpreted in these circumstances?

[mwyatt]

Hey Andy:

I think you're going to run into the REA 5-year lookback problem in this situation here, even ignoring the partial termination issue.

[AndyH]

I have done very little with terminations in recent years, but my impression is that GCM 39310's cashout/repayment rules allow us to avoid a lookback beyond maybe one break in service. I could be wrong, but that is my understanding, that the IRS lets us forfeit if the plan has a cashout/repayment provision and the termination date is later than the cashout date. But in this case that I'm dealing with there is no lump sum except under $5,000, and the plan is not top heavy and has 5 year cliff vesting, so there are virtually no cashouts due to the low GATT rates; thus I think we have a lot of 0% vested deemed cashouts.

[david rigby]

I think your plan has to specify "deemed cashouts". (BTW, if so, it should also include "deemed repayments" language if the person is rehired.)

Back to the original question. Looks like two separate events. If you have a partial termiantion, then that should trigger 100% vesting for affected participants. A plan termination in the next year would trigger 100% vesting of affected participants at that time.

I think you should treat "to the extent funded" as meaning "as if the plan were then terminated". Others may have different opinions.

[Kirk Maldonado]

Representatives of the IRS has stated that it is their position that GCM 39310 only applies to defined contribution plans.

[AndyH]

Well, thanks for the feedback Kirk, but that has not been our experience.

Our DB documents say that a non-vested participant is deemed to have received a cashout upon the ocurrence of a one year break in service, and I am told by our "terminators" that the IRS has always accepted termination applications with those people non-vested and those not having incurred a break in service vested.

Isn't this consistent with GCM 39310? This is certainly the first time I've heard that position.

[WDIK]

Our DB documents say that a non-vested participant is deemed to have received a cashout upon the ocurrence of a one year break in service.

What about partially vested participants?

Is everyone talking about the same thing?

[AndyH]

A partially vested person must receive a cashout; you can't deem somebody cashed out that has a vested benefit that hasn't been paid.

[WDIK]

Sorry, if my prior post seemed obtuse. I understand about deemed cashouts. To clarify, in AndyH's experience "the IRS has always accepted termination applications with those people non-vested and those not having incurred a break in service vested."

It sounded to me as if those people being referred to were the deemed cashouts. What I was really trying to point out was the fact that it was unclear from the post if the IRS accepted termination applications where partially-vested, cashed-out participants were not entitled to the nonvested portion of their benefits.

[david rigby]

The other link in the "deemed cashout" issue is that the plan has provisions to require distribution where possible (that is, under $5000) and actually does so in practice. I think this would include partially vested or fully vested terminations.

[AndyH]

Right, pax, I agree. But in reality, if you have a decent formula, a 5 year cliff vesting, and a generally professional work force, then you won't have many $5,000 cashouts, which are the particular facts in my case.

But isn't this all GCM 39310 anyways, so if that doesn't apply to DB plans then we'd be back to the 5 year lookback. But I am told that our experience has been that if a one break in service has occurred, the IRS does not require 100% vesting. And, yes, I believe that there would need to be a pattern of cashouts as well, to the extent possible.

DMB, I'm not sure of the answer to your question, but I would think that 100% vesting would be required for a partially vested person that has not been cashed out. I think one key is when does a forfeiture occur under the terms of the plan and I would think that a cashout or occurrence of 5 breaks would be needed.