Parital Plan Terminations

[jkdoll2]

In determining a partial plan termination - do you count all eligible participants or just the participnats that are deferring and have a balance (terminated employees). I get confused in the rev ruling 2007-43 exactly what they mean by participating participants and the affected participants. Everyones determination of the wording is different.

Would I count up all the participants with a balance in the plan and then divide it by the participants that terminated within that year that had a balance (due to layoffs). Or do you count all eligible participants (deferring or not) and then divide it by the participants that terminated due to layoffs?

This could make a big difference when there is dual entry dates versus 401(k) - immediate eligibility, and profit sharing (1 year wait).

Thanks

[Belgarath]

You're right that there are a lot of different opinions. However, the IRS takes the approach that if you are eligible to defer in a 401(k), you are a participant for these purposes.

[jkdoll2]

You're right that there are a lot of different opinions. However, the IRS takes the approach that if you are eligible to defer in a 401(k), you are a participant for these purposes.

Do you have anything in writing stating that. TAG (Technical Answer Group) says you have to have a balance (vested or non vested) to be a participating participant, and that you only add them up (ones with balances).

Thanks

[Belgarath]

Nothing "official" - just a discussion from the Q&A session of the ABA meeting several years ago that an attorney had sent to me. I checked Sal's EOB, and he has nothing official, but also refers to this, specifically Q&A-40 of the 2004 meeting on May 7th. I have also heard this view expressed by some who have actually conversed with IRS personnel.

I'd be hesitant to take TAG's approach unless my client was prepared to fight it if audited.

[Guest Sieve]

Belgarath is right, and I think the confusion comes from the nomenclature used by most TPAs.

It seems that people have lost sight of the fact that you are a partcipant in a plan when you meet the plan's eligibility requirements (and pass the next entry date), not when you have accrued a benefit. There are so many 401(k)s around, that TPAs often split employees into 2 groups--eligibles (employees in the plan by having met eligibility requriements, but not deferrring) and participants (those actually deferring). But all those eligible to defer (i.e., in the plan after meeting eligibility requirements) are participants, whether or not they defer.

For example, the plan may be a straight PSP and some of those who have met eligibiltiy requirements have earned no accrued benefit because the employer made no contributions last year. But, all those individuals are particiapnts in the plan. If it's a 401(k) plan, you are a participant if you've met eligibility standards and passed the next entry date, whether or not you actually defer.

The partial termination Rev. Rul. states that "[t]he turnover rate is determined by dividing the number of participating employees who had an employer-initiated severance from employment during the applicable period by the sum of all of the participating employees at the start of the applicable period and the employees who became participants during the applicable period." A participating employee in any retirement plan, 401(k) or not, is an employee who meets the plan's eligibility requirements and has hit the next entry date--whether or not that participating employee (participant) has yet accrued a benefit.

Of course, you do not "benefit" under a plan for purposes of IRC Section 410(b) minimum coverage without a credit to your account (contributions or forfeitures) during the year, but that's a different issue altogether.