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Partial Termination - Who Vests?


Guest CHUDS100

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Guest CHUDS100

Are participants who are terminated for cause in the year a partial termination occurs entitled to full vesting?

Rev. Rul. 2007-43 provides that "f a partial termination occurs on account of turnover during an applicable period [generally the plan year], all participating employees who had a severance from employment during the period must be fully vested in their accrued benefits, to the extent funded on that date, or in the amounts credited to their accounts."

This makes me think yes. Thoughts?

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Think "affected participants", and "facts and circumstances".

IMHO, the facts you presented are not enough to determine the answer to your question.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest CHUDS100

Thanks.

Assume that a partial termination occured in plan year 2008. Also assume that 10 participants were legitimately terminated "for cause" in 2008. Must these 10 be fully vested?

411(d)(3) provides that each "affected employee" must be fully vested upon a termination or partial termination. The regs also don't define "affected employee."

The language I cite in Rev. Rul. 2007-43 (available at http://www.taxalmanac.org/index.php/Rev._Rul._2007-43) indicates to me that all participating employees who are terminated in 2008 must be fully vested. The Rev. Rul. does not exclude employees terminated "for cause" from this requirement.

I am aware of case law that provides that employees who are terminated "for cause" do not need to be counted for purposes of determining whether a partial termination has occured (Rev. Rul. 2007-43 does not seem to follow this), but nothing on vesting.

Thanks again.

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Guest Sieve

I would argue that a "for cause" termination is not employer intiated--at least if the cause is gross misconduct (as opposed to under-performance or plant close-down)--and that therefore gross misconduct "for cause" terminations do not count towards the determination of whether a partial termination has occured. As the Rev. Rul. says: "In certain situations, the employer may be able to verify that an employee's severance was not employer-initiated."

But, even so, the Rev. Rul. pretty clearly applies the full vesting rule to all those who terminate during the period of the partial termination. Under the regs, on the other hand, I would say that the "for cause" terminations are not "affected" by the partial termination--if, that is, they properly are excluded from the calculation of the partial termination percentage.

Take your pick--but I fear that the Rev. Rul. language you quote will cover all terminations during the partial termination period.

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I would argue that a "for cause" termination is not employer intiated--at least if the cause is gross misconduct (as opposed to under-performance or plant close-down)--and that therefore gross misconduct "for cause" terminations do not count towards the determination of whether a partial termination has occured. As the Rev. Rul. says: "In certain situations, the employer may be able to verify that an employee's severance was not employer-initiated."

But, even so, the Rev. Rul. pretty clearly applies the full vesting rule to all those who terminate during the period of the partial termination. Under the regs, on the other hand, I would say that the "for cause" terminations are not "affected" by the partial termination--if, that is, they properly are excluded from the calculation of the partial termination percentage.

Take your pick--but I fear that the Rev. Rul. language you quote will cover all terminations during the partial termination period.

I think Sieve is right on target.

A few years ago I represented a surgeon who had two full-time employees and a profit sharing plan. The next business in the building suite where the surgeon's office asked how it was working out with the 'two part-time employees' handling his office. Out of concern, the surgeon hired a PI to surveil the comings and goings of his two employees. The result was clear time clock fraud. He fired both of them. One was 20% vested, the other 40%. That's all he had the profit sharing plan pay out to them. They then contacted the regional office of PWBA (EBSA's prior name). PWBA was adamant about the firings being a partial termination, that it would not relent and that if payout of the otherwise forfeited benefits was not made, PWBA would litigate the issue for the two former employees. PWBA did not question the allegation of time card fraud, but insisted it was a partial termination nevertheless.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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John - this brings up a question re jurisdiction. It is possible for an employer to file for a determination letter with the IRS to get a ruling on whether a PPT has, in fact. occurred. Termination for cause might be a mitigating factor that they would accept. In your situation, let us suppose that the IRS did make a formal determination that no PPT had taken place. What happens then? Is the DOL bound by the IRS? Do they have any "agreement?"

At a guess, the IRS ruling would stand for plan qualification purposes, and the DOL would still litigate...

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John - this brings up a question re jurisdiction. It is possible for an employer to file for a determination letter with the IRS to get a ruling on whether a PPT has, in fact. occurred. Termination for cause might be a mitigating factor that they would accept. In your situation, let us suppose that the IRS did make a formal determination that no PPT had taken place. What happens then? Is the DOL bound by the IRS? Do they have any "agreement?"

At a guess, the IRS ruling would stand for plan qualification purposes, and the DOL would still litigate...

It's been long enough ago, I do not remember what procedural avenues were open to us and were considered. Off the top, I don't know if the Reorganization Plan of 1978 gave this issue to just one agency or other, or if as you suggest, vesting on partial termination is for the IRS an issue of tax qualification of the plan and separately for DoL to protect the benefits interests of the employees.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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  • 3 years later...

Is anyone aware of an update to this issue?

I have an ESOP that has a 17% turnover ratio if you don't include the people let go because of cause. It isn't much higher with the "with cause" people added. So it appears they don't meet the 20% threshold for a presumption of a partial termination. I seem to recall the last time I looked up case law some cases people who were let go because of cause didn't factor in the count or needed to be 100% vested in a number of cases.

It seems odd if you have to make people terminated for cause 100% vested. It would seem if the government is taking that position all terminations for cause of in fact backdoor layoffs.

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The language of the Revenue Ruling makes the PPT calculation dependent on employer-initiated terminations with no exceptions for termination for cause. By the way, when employers believe an employee was terminated for cause, state law or a judge do not always agree with this conclusion.

We include terminations for cause in our PPT calculation and inform the employer that there is a presumption of PPT if the ratio is 20% or more. If the employer is able and willing to demonstrate to the IRS that some of the terminations were not employer-initiated then those terminations may be excluded from the calculation. However, we clearly outline the risk on audit.

PensionPro, CPC, TGPC

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John - this brings up a question re jurisdiction. It is possible for an employer to file for a determination letter with the IRS to get a ruling on whether a PPT has, in fact. occurred. Termination for cause might be a mitigating factor that they would accept. In your situation, let us suppose that the IRS did make a formal determination that no PPT had taken place. What happens then? Is the DOL bound by the IRS? Do they have any "agreement?"

At a guess, the IRS ruling would stand for plan qualification purposes, and the DOL would still litigate...

The IRS not the DOL has the authority to rule a partial termination has or has not occrured. If you subbitted for a ruling that a partical termination did not occur and the IRS agreed then the DOL would be out of luck on the matter. Though I would assume such a rulling would have to be made before the DOL brought suit since I think you have disclose matters pending before other government agencies such as DOL, PBGC and Bankrupcy Court when requesting the partial termination ruling. If the DOL was already involved I suspect convincing the IRS that there was no partical termination would be much more difficult.

Did the doc consider repalcing the fired employees and making them immediatly eligible for the plan? I always wondered if that would be a way around the partical term rules in a small plan.

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  • 4 months later...

If a plan requires one year of service for eligibility, but two years of service for 20% vesting, if such a participant left employment during a year of a partial termination, that participant would still stand as fully vested?

Yes. Once they are a participant, they would vest to 100%. You don't need to be vested to be a participant.

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