Partial Termination

[Scott]

Company A has a qualified plan. On 1/1/98, the plan had 90 participants. On 12/31/98, the plan had 64 participants. Of the 26 that dropped from participation, 4 quit, 2 were transferred to a nonparticipating foreign affiliate, and 20 were laid off. Under the rule of thumb of a 20% or more reduction in participation during a year, this appears to be a partial termination.

My question is: must Company A cause to be fully vested (a) all 26, (B) only the 20 who were laid off, or © only the 22 who were laid off and/or transferred?

[david rigby]

The issue of Partial Termination is driven by facts and circumstances more than by statute or by regulation. Issues about vesting are contained in statute and regulations for IRC Sec 411.

There is also a fair amount of court cases, not all of which will be applicable to most situations. Let me present some thoughts. (I am an actuary, not an attorney. It is recommended that competent ERISA legal counsel review your situation.)

Reportable Event:

A significant reduction in the number of active participants during a plan year. For this purpose, a significant reduction is defined as:

· a 20% reduction from the beginning of the current plan year, or

· a 25% reduction from the beginning of the prior plan year.

The reduction need not be from a single event. This Plan experienced a 29% reduction in active participants during 1998 (26 out of 90). Thus, the Plan has experienced a Reportable Event under rules of the Pension Benefit Guaranty Corporation (PBGC). Please note that I am assuming your "90 participants" means "90 active participants". If not, you should do the above arithmetic using only the actives.

However, the Plan may meet one of the conditions under which reporting is waived. PBGC regulation § 4043 and the instructions to PBGC Form 10 indicate that the reporting of this event is waived if the plan has less than $1 million in unfunded vested benefits.

Partial Termination

A "partial termination" is an event (or series of events) which causes a significant reduction in active participants. A partial termination usually occurs when a group of participants is eliminated from the plan, either by plan amendment or by involuntary termination of employment. The IRS examines the facts and circumstances of a particular event to determine whether a partial termination has occurred.

· Significant reduction in participation. When a group of participants is involuntarily eliminated from the plan, a partial termination occurs if the reduction in participants is significant. The IRS focuses on the percentage of participants, not the number of participants, eliminated from the plan to determine if the reduction is significant. The IRS defines "significant" to be more than 20% of the participants. The IRS discusses this issue in several Revenue Rulings, all of which involved terminations of more than 50% of the participants. Where the reduction is under 50%, but over 20%, the IRS may be willing to consider mitigating facts and circumstances. If an employer believes there are circumstances that should not lead to a partial termination, then the employer can seek an IRS determination letter on the partial termination if it is unwilling to accelerate vesting after a reduction involving more than 20% of the participants. Alternatively, the plan sponsor can amend the plan to award 100% vesting to the affected participants, thus making the question moot.

· Litigation. The courts have generally followed the guidelines established by the IRS, looking to whether the percentage of participants terminated from the plan is significant.

· Involuntary termination required. 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). The IRS presumes all terminations are involuntary unless the employer shows otherwise.

The consequence of a partial termination is to award 100% vesting to affected participants. Some affected participants may already be 100% vested. (Only the vesting is affected, not the amount of the accrued benefits.)

Conclusion

You must make your own conclusion. If a partial termination has occurred, in order to avoid any ambiguity, you may wish to consider of a Plan amendment to award 100% vesting to affected participants who terminated employment during 1998. Such amendment might be:

· targeted to all 1998 terminations, without regard to location or reason for severance, or

· restricted to the facility closing, or

· restricted to involuntary terminations, or

· some combination of the above.

Of course, this should be subject to review by your legal counsel.

Other

The same issue of a partial termination may also apply to any other qualified plan that covers the same employees. However, each plan must be evaluated on its own if the plan covers other employees.

[This message has been edited by pax (edited 07-09-99).]

Also, check your plan document (and collective bargaining agreement if relevant) to make sure there are no other provisions that would apply in the event of a layoff. Such "plant closing" enhancements might affect the amount of the benefit; the vesting is affected by the partial termination.

[This message has been edited by pax (edited 07-11-99).]