Partial Plan Termination

[Andy the Actuary]

Does Rev. Rule 2007-43 mean if I have one employee and fire that employee that a PPT has occurred?

[david rigby]

Maybe. Is that employee a participant? Is that employee over NRA? (See parenthetical phrase in second paragraph of "FACTS", or second sentence of second parargraph of "ANALYSIS".)

The default is to assume the severance of employment is ER-initiated. However, finding an employee embezzling from you (for example) does not mean a firing is initiated by the ER. Hence the last sentence in the second paragraph of "ANALYSIS".

[John Feldt ERPA CPC QPA]

Also, the facts and circumstances also look at normal turnover and replacing employees, but I see no bright lines in there:

"Whether or not a partial termination of a qualified plan occurs on account of participant turnover (and the time of such event) depends on all the facts and circumstances in a particular case. Facts and circumstances indicating that the turnover rate for an applicable period is routine for the employer favor a finding that there is no partial termination for that applicable period. For this purpose, information as to the turnover rate in other periods and the extent to which terminated employees were actually replaced, whether the new employees performed the same functions, had the same job classification or title, and received comparable compensation are relevant to determining whether the turnover is routine for the employer. Thus, there are a number of factors that are relevant to determining whether a partial termination has occurred as a result of turnover, both in the case where a partial termination is presumed to have occurred due to the turnover rate being at least 20 percent and in the case where the turnover rate is less than 20 percent."

[J Simmons]

I had a situation a few years back representing a surgeon who had two employees that handled his filing and billings. He spent all his working time at the local hospital. The three of them were all participants in a profit sharing plan that had a 2-6 year graded vesting schedule.

The office neighbor to the billing office noticed over a couple of months time that both of the surgeon's employees' cars were never there at the same time. The office neighbor asked the surgeon how that was working out letting the two of them split a single full-time shift. That was to the surgeon's surprise. They were both full-time employees.

He hired a PI who documented the comings and goings of the two employees over two payroll periods, and then compared the PI's report to the claimed hours worked for time card and payroll purposes. They did not jive. He terminated and pressed charges for timecard fraud.

The surgeon had the plan pay out the vested portions of their benefits. The two fired employees contacted the DoL about the forfeiture, and the DoL office in San Francisco adamantly maintained their position was this constituted a partial termination for immediate vesting period, despit the timecard fraud. The explanation was that the terminations were nevertheless employer-initiated because of the employees did not quit.

The DoL insisted on an 'uncle' agreement from the surgeon that he would pay all the accrued benefits to those two employees, threatening civil enforcement action if he did not. He wasn't willing to take a stand and defend it in court, but simply paid out the amounts that should have been forfeited.

[Andy the Actuary]

Your account makes me feel as if I were playing in a high-stakes Texas Hold-em game and was outpulled on The River (last card) by some rube. Counter-reason anecdotes like your's simply accentuate how the government is killing the private pension system.

Someone once told me about a client who had an employee who had embezzled $150K and went to prision. Every year, the someone would complete the 401(k)/ps allocation and prepare a statement for the felon. The client would rifle through the statements, pull out the felon's statement, and tear it to shreds.

It was wise your client didn't fight the DOL. The tax courts frown on any businessman who acts in a reasonable fashion.

[John Feldt ERPA CPC QPA]

Thanks John, that story really stinks. I guess if the accounts were't very big it was cheaper to just 100% vest and then pay out. I'd like to hear a DOL representative speak to this situation at a conference.