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Partial Plan Termination


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My client is planning a sizeable reduction in work force this week, one that will impact more than 20% of their domestic work force and therefore result in a partial plan termination of our 401k plan.

1) Do they need to notify participants in any way about the PPT and if so, what timelines are attached to this notification? If notification is required, is it only those participants affected or the continuing (non-affected) employees as well?

2) Some of the employees who will be notified next week will be kept on up through 3/31/13 in order to complete some projects. Since they will be notified next week but will remain employed what time period for the PPT determination can stretch beyond one plan year if circumstances require it. Does that mean that the PPT period would be from 1/1/12 to 3/31/13? and if so any employee involuntarily terminated (even for performance) between 1/1/12 and 3/31/13 would need to be fully vested?

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A partial termination is (generally) a facts and circumstances test.

First, the IRS presumes all terminations during the appropriate time frame are subject to the deemed vesting requirement.

Second, the plan sponsor has the ability to document other facts that might exclude some of those terminations. For example, an employee who died (but this might trigger 100% vesting anyway).

1. Since a partial termination (usually) provides only 100% vesting, the appropriate notification is that which you would provide another VT.

2. If your "event" begins this week, it need not be retroactive to the beginning of the year, and can extend into a subsequent PY.

Several prior discussion threads on this topic, which you can find using the Search feature.

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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You may find Rev. Ruling 2007-43 helpful. Here is an excerpt from the Analysis section:

Based on the foregoing, whether a partial termination of a plan under ยง411(d)(3) has occurred depends on the facts and circumstances, including the extent to which participating employees have had a severance from employment. If the turnover rate is at least 20 percent, there is a presumption that a partial termination of the plan has occurred. The 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. 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.
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