Plan Termination and the distribution

[Guest jetfaninmn]

I have a plan that is terminating 5/31/06. We were notified that this was going to happen sometime in late January. We are still awaiting a written confirmation of termination.

I have three participants from the plan who have terminated in the past year - all not fully vested.

The first terminated in January, the other in March and the final one in April.

How far do we go back for making the terminated ee's 100% vested? Is there a reg or just a "rule of thumb"?

Thanks!

[ERISAnut]

They will become 100% vested unless they have received cashout distributions of their accounts.

[JanetM]

I would think it would be facts and circumstances. Did the employer begin downsizing in 2005 for eventual closure? Is the employer just terming the plan to retire? Will all employees eventually be let go? Will business continue.

Were participants notified that plan would terminate? Do these 3 constitute a large % of population?

ERISAnut, don't understand how you can just say the three would be 100% vested as long as they don't receive distribution?

[Belgarath]

I agree with Enut. This isn't a partial plan termination question, it is where the plan is terminating. Under IRC 411(d)(3), all affected employees become 100% vested. Although "affected employees" isn't defined, I know there was a GCM (sorry, don't know the number offhand) that basically said if you hadn't had a forfeiture, you were an affeced participant. And if they were partially vested, then there's no forfeiture until either there's a payout (prior to termination) or the 5 break years. (This is only if they are partially vested - there can be a "deemed forfeiture" if the plan so provides for a zero % vested participant, and this won't be subject to 100% vesting upon subsequent plan termination.)

[ERISAnut]

You know, the interesting thing is that the plan document already includes the language requiring 100% vesting. It is one of the form requirements for plan qualification. So, the facts and circumstances being applied would be to follow the terms of the plan. Just another way of looking at it. But Belgarath actually articulated the fact that a forfeiture event must occur prior to forfeiting an employee's nonvested balance. 411(d)(3) defines the forfeiture event.

[JanetM]

Enut, yes GCM 39310 says all should be made 100% vested. But not all courts have agreed with this.

A circuit court reached a contrary result and ruled that partially vested former participants do not have to be vested on plan termination if the employer went out of business. When Walter Borda quit working for the Hardy, Lewis, Pollard & Page law firm, he was only 40 percent vested in his accrued benefit. When the plan was terminated three years later after the law firm split into two firms, partially vested employees forfeited their unvested benefits. Mr. Borda claimed he should have become fully vested in his benefit at plan termination. The plan administrator disagreed, arguing that because the plan sponsor no longer existed, terminated participants could not avoid forfeiture by returning to service and earning additional vesting under the plan. Therefore, terminated employees were not affected employees entitled to vesting under ERISA.

The court agreed with the plan administrator. The court found nothing in ERISA to contradict the plan administrator's interpretation. Interestingly, the court did not consider the plan administrator's refusal to vest terminated participants inconsistent with the IRS requirement to vest all participants with unvested benefits on the plan termination date. Implicit in the IRS position --in the view of the court --is a belief that the separated employee still stood to be affected by the plan termination.

To determine which employees were affected employees, the court relied in part on a three-part analysis from Bayer v. Holcroft/Loftus, Inc. [769 F Supp 225 (ED Mich 1991)]:

1. The participant's employment ended long before the plan termination.

2. There was no evidence that the participant's termination was linked directly to the plan termination.

3. Plan participants were unaffected by the plan's termination unless they were employed by the plan sponsor when the plan was terminated or their discharge was linked directly to the plan's termination.

[borda v Hardy, Lewis, Pollard & Page, PC, 138 F 3d 1062 (6th Cir 1998)]

[Belgarath]

Interesting. I wasn't aware of this. Is this the only circuit that has adopted this interpretation, or has it not been litigated anywhere else?

For you attorneys out there, in light of this, what would you advise?

[ERISAnut]

I remember the case with the sixth circuit. There were some details about the employer dissolving. Important to note that the IRS could still disqualify the plan, but that is another discussion.

It was only the sixth circuit. I think is was Ohio.

[J2D2]

Michigan

[Guest jetfaninmn]

The participant in question was fired on 4/30/06. She is 40% vested. The plan terminates on the 31st of this month. She has not yet been paid out, but we do have her paperwork. What is her vested amount - 40 or 100%

[Guest Pensions in Paradise]

IMHO, if this is a calendar year plan I would fully vest all participants who terminated during 2006.

[Guest jetfaninmn]

Thanks and I feel that is best to make them 100% vested as well.