401k's and layoffs

[Guest Guilbert]

My company will be closing on March 31, 2007. Approximately 20 employees will lose their jobs. We have a 401(k) profit sharing plan with a 5-year vesting cycle. The company was started in 2000 and most employees are not fully vested in their 401(k) accounts. Our 401(k) plan is shared with a sister company that will not be closing and none of the employees working for that company will lose their jobs. Is my company required to fully vest all of the 401(k) contributions it has made to the participants' accounts? There is conflicting information and the company does not want to vest everyone.

[JanetM]

Maybe, maybe not. You say sister company will be unchanged but all employees in your company will be out of work. It depends on how the plan is set up and how many employees are in the other company.

[Locust]

It may not be clear what the company must do in your situation. Note that employee 401(k) contributions are always 100% vested, so only the company contributions should be at issue.

However, if I were an employee whose job was being eliminated, I would make it clear to the company that I expected to be 100% vested, and maybe even threaten to make a complaint to the Department of Labor and IRS if it looked like that wasn't going to occur. In my experience most companies in your employer's situation would fully vest accounts.

[Guest Pensions in Paradise]

The employer is only required to fully vest your benefit if there is a partial termination of the plan.

Threatening the employer will accomplish nothing.

[Jim Chad]

I would like to add that the Employer can't " be a nice guy" about it. He has to follow the rules. If it is a partial termination, he has to fully vest the terminating Participants. If the number of employees in the sister company is high enough it will not be a partial termination.

It may be possible to amend your document to make all of you fully vested. But there may be complications to this that they are unable or unwilling to deal with.

[Locust]

P in P and Jim - I disagree.

The employer does not want to be perceived as a bad employer. If it wants to avoid that perception, it will want to avoid employee complaints in this situation, especially when complaints have some common sense appeal. A good standard is how it would look in the local newspaper. How does it look when a company shuts down, involuntarily terminates all of its employees, and then forfeits their nonvested accounts?

Also, the detemination of what is a partial termination is hardly cut-and-dry. The fact that the entire company (one of at least 2 in the group apparently) is being sold could on its own be the basis for a determination that a partial termination has occurred. Ultimately, the company (or plan administrator) has to decide if a partial termination has occurred, and because of the ambiguity of the standard, it has a great deal of discretion in making that decision.

Finally, if he doesn't complain to the IRS or DOL, who will help him to review the company's actions and interpretation of the data to determine whether a partial termination has occurred? Without the IRS and DOL, he is relying upon the good behaviour of the company, which has incentives to consider this not to be a partial termination.

I see nothing wrong with squawking about it if the company doesn't do the right thing. Sometimes that's what it takes to get the correct result.

[Guest Pensions in Paradise]

Who says fully vesting terminated employees is the "right thing" or the "corect result"? Thats why plans have vesting schedules and thats why the IRS/DOL regulations provide for partial terminations. Please stop putting false hope in this participants head. If the employer wanted to fully vest the participants I would assume it would have done so already.

[four01kman]

I seem to recall there are a number of ways the IRS (or the appeal process) determines if a partial termination occurred. One of them certainly dealt with the 20% (approximate) rule. Another, as I recall, dealt with geography; that is, if a geographically dispersed unit closed down (or was sold), a partial termination was deemed to occur, without regard to the number or percentage of employees. Again, this is my recollection of things in the not recent past, and I don't have a cite.