Partial Termination in small plans

[flosfur]

A plan has 5 active participants and 1 terminated participant. Two of the actives are owners. The 3 non-owners are laid off.

a) Did the plan experience partial termination?

b) If yes, does the previously terminated participant become 100% vested also?

c) Suppose only one employee was laid off (1/3rd of non-owners). Is there a partial termination? What if two were laid off?

[WDIK]

A partial termination is a facts and circumstances test (although a rule of thumb is 20% of participants being affected), so more facts and circumstances are needed. Nonetheless, my opinions are:

a) Yes.

b) No.

c) No. Maybe.

[JanetM]

The one who termed previously, was it voluntary or involuntary. You only count the involuntary terms when looking at partial termination.

Facts and circumstances are what is needed. Look at big picture over period of time, was there planned decline in staff over few year period? What are the plans for future staffing, will it increase of decrease?

[david rigby]

You only count the involuntary terms when looking at partial termination.

Correct, but the IRS presumes all terminations are involuntary unless proven otherwise.

There are a signigicant number of prior discussion threads on partial terminations, which are recommended reading.

[flosfur]

The one who termed previously, was it voluntary or involuntary. You only count the involuntary terms when looking at partial termination.

Facts and circumstances are what is needed. Look at big picture over period of time, was there planned decline in staff over few year period? What are the plans for future staffing, will it increase of decrease?

What big picture, planned decline in staff and future staffing plans? We are not talking about General Motors or IBM here! We are talking about a micro-employer whose fortunes change month to month let alone from year to year! If he loses one on-going contract, he may have to let everyone go (which could be 1 employee!) or if he gets one big new contract he may have to hire a dozen more employees?

What if the employer has one employee and he has to let him go? Does that employee become 100%? What if the employee leaves of his volition?

[E as in ERISA]

There has to be company action of some type in order for there to be a partial termination. You don't have a partial termination if 25% of the work force hates the boss and quits. The issue on the former employee is whether his termination was related to this company action or completely indepedent.

[Belgarath]

You seem a bit testy on this considering folks are merely attempting to respond to your question. But I'll give it a shot.

Under 1.411(d)-2(b)(1), the general rule is that it is indeed a facts and circumstances determination. If you have one NHC and you lay them off, is this a PPT? Well, probably yes. The "more than 20%" rule alluded to earlier can be found in Revenue Ruling 94-101. Also, this same ruling in the audit guidelines mentions the assumption that all employee terminations are involuntary unless the employer can prove otherwise. There was a court case which I cannot remember back in the 1980's, as well as GCM 39344 which set forth the fact that voluntary employee terminations do not count (except in "constructive discharge cases" - there was another court decision for this which I also cannot remember). Hence all the discussion of facts and circumstances, as hard and fast rules are few and far between in this arena. And the back and forth with the courts in the Matz case is a good example of the lack of clarity that as TPA's we would like to see.

You can apply for a determination letter on a 5300 if you think it is questionable and that the IRS should consider mitigating circumstances where the termination percentage is higher than 20%. I've never done this myself, so have no opinion on how likely you would be to succeed on such a request.

[Locust]

It's a facts and circumstances test. To be safe all the terms should be 100% vested.

It looks to me like a classic partial termination - the nonhighly compensated employees are terminated, they forfeit their nonvested accounts, and the forfeitures go to the owners! Pretty bad deal for the terms, pretty good deal for the owners.