Plan Terminations

[Guest emmpsrm]

My client is a closely held corporation with one shareholder who runs the business. It had 18 employees. He has apparently been telling employees he planned to retire, and encouraging them to take other job opportunities if they came up. In 2007, fifteen of them did so and were not replaced. He came to me recently to discuss terminating the profit sharing plan and dissolving the corporation, and I told him the IRS would likely look at 2007 as a partial termination, requiring the departing employees to be 100% vested. He has already cashed them out at their place in the vesting schedule as of 12/31/2007. The obvious problem is that given the market issues, he no longer has the funds in the trust to cash these people out at 100%, to say nothing of the remaining participants, which include himself.

My sense from reiewing the law is that we could argue that these were voluntary terminations which did not constitute a partial termination but it would be our burden to demonstrate the terminations were voluntary. Does anyone have experience with this issue?

My other issue is I cann't find out what happens when a defined contribution plan does not have the funds to meet its obligations. Obviously that isn't supposed to happen, but it did here. Any suggestions would be appreciated.

[JanetM]

I would also argue that the voluntary terms don't make for partial termination.

If this is daily valued plan and individual accounts I don't understand is why you think the plan is short of funds. The amounts forfeited have gain/loss just like participant accounts. Example is $1000 forfeited at 12/31/07. That forfeited amount is now valued at $700. If you do elect to consider this partial termination the person made whole gets the $700 today.

If plan is balance forward, the forfeited amounts are revalued at year end and what ever the value that consitutes the total forfeited amount.

[Guest emmpsrm]

I would also argue that the voluntary terms don't make for partial termination.

If this is daily valued plan and individual accounts I don't understand is why you think the plan is short of funds. The amounts forfeited have gain/loss just like participant accounts. Example is $1000 forfeited at 12/31/07. That forfeited amount is now valued at $700. If you do elect to consider this partial termination the person made whole gets the $700 today.

If plan is balance forward, the forfeited amounts are revalued at year end and what ever the value that consitutes the total forfeited amount.

[Guest emmpsrm]

I would also argue that the voluntary terms don't make for partial termination.

If this is daily valued plan and individual accounts I don't understand is why you think the plan is short of funds. The amounts forfeited have gain/loss just like participant accounts. Example is $1000 forfeited at 12/31/07. That forfeited amount is now valued at $700. If you do elect to consider this partial termination the person made whole gets the $700 today.

If plan is balance forward, the forfeited amounts are revalued at year end and what ever the value that consitutes the total forfeited amount.

[Guest emmpsrm]

Actually its an annual valuation with payouts at the 12/31/07 valuation date so at 100% vesting the amount owed is more than is currently in the plan.

[Guest Sieve]

To address one of your issues, I would agree with Janet about voluntary terms not being considered part of a partial termination.

But, it's not a slam dunk. The recent Rev. Rul re: partial terminations considers ALL terminations to be initiated by the employer, so you need good data to counteract that presumption. Also, on IRS/DOL audit you may well come up against the argument that those who knew that the business might close upon the owner's retirement are, in fact, involuntary terminations since they'd have been involutarily terminated if the hadn't left when they did --the old "they saw the writing on the wall" sword.

You can ask for a partial termination ruling on IRS Form 5300. I presume--but do not know for sure--that you also can request a ruling that there is NOT a partial termination as part of that FDL process, if you want. You might want to consider that under the circumstances.

[Bird]

I agree it's not a slam dunk and think it's probably an uphill battle given the facts. And if you file for a DL on a 5310, you have to provide information on those who term'd in the last 5 years, and my experience is that they follow up and ask for more information (to the extent that they will actually challenge you about 1 random person who quit 3 years ago without full vesting). That doesn't mean they're right, but it's probably best to address it sooner rather than later with some kind of a submission, either a 5310 (and not pay anyone until you get a letter) or, as Sieve suggests, a direct request for a partial termination ruling on a 5300. Or just bite the bullet and give the full vesting (and I think you should be able to allocate losses to the unvested portion...although I'm guessing that part of the valuation problem is that losses weren't allocated to the unvested portions that were paid already...sounds like a perfect storm of bad timing).