Partial Termination

[Randy Watson]

The applicable period for determining whether a partial termination has taken place is generally the plan year, but it can be expanded if the RIFs that span that greater period are related to the same corporate event. If a business has been faced with economic hardship for a 3-year period and made numerous RIFs during that period, would that be enough to link all those RIFs together for purposes of determining whether the 20% threshold has been exceeded?

[J Simmons]

This quote, and the cases cited in it, might be a starting point for you to find out:

"One of the unresolved issues is whether the terminations should be treated as a single termination. They were closely related in time (all occurred between the end of August 1994 and the end of June 1996) and appear to have had the same motive, unlike the two partial terminations in Administrative Committee of Sea Ray Employees' Stock Ownership & Profit Sharing Plan v. Robinson, 164 F.3d 981, 987-88 (6th Cir.1999), which had unrelated causes. See Matz v. Household International Tax Reduction Investment Plan, supra, 227 F.3d at 976-77 and 265 F.3d at 576; Weil v. Retirement Plan Administrative Committee, 750 F.2d 10, 13 (2d Cir. 1984). But there is no actual finding by the district court." Matz v. Household International Tax Reduction Investment Plan, 388 F3d 570 (CA7 2004).

[Randy Watson]

Okay, assume we have a partial termination for one plan year. Who has a right to full vesting? The Code provides for the vesting of "affected participants", which seems to imply that only those who were involuntarily terminated have the right to full vesting. However, Rev. Rul. 2007-43 states that "all participating employees who had a severance from employment" during the applicable period must become fully vested. It sounds like the IRS' position is that those who voluntarily terminate during the plan year in which a partial termination occurs must be fully vested. Is that your understanding?

[J Simmons]

I think the vesting due to partial termination only applies to those that the employer initiated the termination of employment.

An employee's severance from employment is employer-initiated even if caused by an event outside of the employer's control, such as severance due to depressed economic conditions. In certain situations, the employer may be able to verify that an employee's severance was not employer-initiated.

Rev Rul 2007-43.

As for the time frame, the IRS position seems to be that the 'Applicable Period' is at a minimum a 12 month plan period, but could be longer. This quote is another from Rev Rul 2007-43:

The applicable period depends on the circumstances: the applicable period is a plan year (or, in the case of a plan year that is less than 12 months, the plan year plus the immediately preceding plan year) or a longer period if there are a series of related severances from employment.

[david rigby]

J Simmons' first quote immediately above means that the IRS assumes all terminations (during the applicable period) are ER-initiated unless and until the ER shows otherwise. Thus, he concludes (correctly) that some terminations might not receive full vesting, based on (yes, you've heard it before) the relevant facts and circumstances.

[ishi]

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. "

Thus, 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?