Partial Plan Termination

[ishi]

Reposting from "plan terminations" board ...

Under a partial plan termination, vesting of the affected participants is required TO THE EXTENT FUNDED. I take this to mean that vesting is granted to non-vested affected participants only if the plan's assets exceeds the Priority Category 5 plan termination liability. Is this a correct interpretation? If so, I would guess that in the current environment, not much extra vesting will be happening. Or said another way, if the assets are below the PC5 liability, who cares if a partial plan termination has occurred?

Thoughts/comments?

[AndyH]

I have read and seen radically different interpretations of "to the extent funded" within that context.

A conservative interpretation would be that the affected parties are vested unless the plan is terminating now in a distress termination, for example. The view that you expressed would be the opposite view. I'm not aware that either are right or wrong, but one is safer than the other absent guidance.

I'd like to hear opinions.

[Guest Spock]

Are you sure that the "TO THE EXTENT FUNDED" language applies to a partial termination? It makes sense to me in a total plan term scenario, but if there is an ongoing plan where a sponsor is still obligated to make contributions, it does not make sense that you can circumvent the effects of accelerated vesting, IMHO.

Reposting from "plan terminations" board ...

Under a partial plan termination, vesting of the affected participants is required TO THE EXTENT FUNDED. I take this to mean that vesting is granted to non-vested affected participants only if the plan's assets exceeds the Priority Category 5 plan termination liability. Is this a correct interpretation? If so, I would guess that in the current environment, not much extra vesting will be happening. Or said another way, if the assets are below the PC5 liability, who cares if a partial plan termination has occurred?

Thoughts/comments?

[ishi]

The language comes from 411(d)(3) ....

"(3) Termination or partial termination; discontinuance of contributions

Notwithstanding the provisions of subsection (a), a trust shall not constitute a qualified trust under section 401 (a) unless the plan of which such trust is a part provides that—

(A) upon its termination or partial termination, or

(B) in the case of a plan to which section 412 does not apply, upon complete discontinuance of contributions under the plan,

the rights of all affected employees to benefits accrued to the date of such termination, partial termination, or discontinuance, to the extent funded as of such date, or the amounts credited to the employees’ accounts, are nonforfeitable. This paragraph shall not apply to benefits or contributions which, under provisions of the plan adopted pursuant to regulations prescribed by the Secretary to preclude the discrimination prohibited by section 401 (a)(4), may not be used for designated employees in the event of early termination of the plan. For purposes of this paragraph, in the case of the complete discontinuance of contributions under a profit-sharing or stock bonus plan, such plan shall be treated as having terminated on the day on which the plan administrator notifies the Secretary (in accordance with regulations) of the discontinuance. "

[ishi]

Notwithstanding AndyH and the pointy-eared one, I am surprised at the lack of comments on this post. I assumed this would have been a hot topic.

I have a client that is about 70% funded on a PC5 basis that is currently close to a partial termination (17-18%), with more layoffs coming. I usually advise the client to consult legal counsel regarding whether a partial termination occurred or not, but why go through the trouble if there are no ramifications? What am I missing here?