Partial Plan Termination

[bzorc]

A very large plan with 3,300 or so participants terminates 500 participants (15.1% of the plan size) in 2016. The auditor asks the TPA whether or not this constitutes a partial plan termination and the answer from the TPA is no, since the termination represented less than 20% of the participants in the plan. However, the auditor is aware that an additional 700 employees (25% of the remaining participants) have/will be terminated in 2017. The plan is not fully terminating per se, just reorganizing, and will continue to operate going forward.

Therefore, knowing what the auditor knows, is there a partial plan termination for 2016? Definitely 2017, but, given the facts and circumstances of this, the argument could be made that the partial plan termination affects 2016 as well.

Thanks for any replies.

 

[My 2 cents]

Plan year doesn't really matter in this - anyone whose termination arose during the reorganization (except perhaps for those terminated for cause) will have to be fully vested (at least to the extent that the plan is funded).  A significant reduction during a period spanning two plan years can certainly be a partial plan termination (which is not to say that  greater clarity in the rules would be useful).

And if the plan is subject to the PBGC, don't forget to report the active participant reduction!

[bzorc]

Thanks. DC Plan so no DB issues. Kind of my thought as well.

[Calavera]

It appears based on these facts that you have a partial plan termination over 2016-2017 years and ALL employees terminated for whatever reason during 2016-2017 years should be 100% vested.

[Belgarath]

I'd be cautious about definitive determinations on this, without knowing the facts and circumstances. Do I agree with the above comments? Yes, with the caveat that you should check this with ERISA counsel. It may be, for example, that the corporate reorganization can be legitimately characterized as two separate and distinct corporate events. And the ERISA counsel could conceivably advise no PPT whatsoever under the right combination of circumstances.

Likely? No. Possible? Yes. I know there has been some litigation in this arena, including Matz, and Sea Ray, among many others. I don't know many of the details, and certainly don't presume to offer an opinion as to the possible interpretations and application of cases to this particular situation - that's up to the attorney!

Also, I don't know how much money is involved. Often it is cheaper to 100% vest than it is to hire counsel, risk IRS ire, possible litigation, etc...

Now, if that isn't a wishy-washy answer, I don't know what is!

Have fun!

 

[MoJo]

Gosh, I hate to agree AGAIN with Belgarath (just on principle) but he raises very good points.  Keep in mind that a "partial plan termination" is a LEGAL conclusion based on facts and circumstances, and they must be taken as a whole, to reach the conclusion.  I am always perturbed when one raises the so-called 20% threshold for a partial plan termination.  It is not a "litmus" test.  It is a "rule of thumb" and generally (but not always, as Belgarath points out) when one exceeds the 20% mark (as a result of one or a series of related corporate actions), a partial plan termination occurs.  BUT, you can MOST CERTAINLY have a partial plan termination with less than 20%.  Case in point, a company with 5000 employees in 10 separate divisions of 500 employees each, doing different work (separate lines completely) can have a partial plan termination when they shut down one division, resulting in a 10% reduction in their entire workforce, but 100% reduction in the workforce of the shut down division.  Partial plan termination?  The IRS would probably say yes - and in my experience, they do.....

[david rigby]

Good advice.  While discussing with ERISA counsel, it is appropriate to discuss how this will be documented.  For example, a plan amendment awarding 100% vesting for all employees at X location who terminate employment between Y and Z dates?  Even if administered correctly with 100% vesting, it helps to have written documentation of why.

[Calavera]

Just in case, some IRS guidance is in Rev. Rul. 2007-43.

In particular: "If a partial termination occurs on account of turnover during an applicable period, 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."

[ESOP Guy]

On 10/2/2017 at 1:30 PM, MoJo said:

It is not a "litmus" test.  It is a "rule of thumb" and generally (but not always, as Belgarath points out) when one exceeds the 20% mark (as a result of one or a series of related corporate actions), a partial plan termination occurs. 

As a practical matter in the IRS' mind it seems like it is more the a rule of thumb.  I am not really disagreeing here (I think) as much as expanding. 

It seems like any time we have an IRS auditor before one of our clients and the ratio goes over 20% in their mind it becomes a presumption there was a Partial Termination that you now have to rebut. 

We have had some interesting times with IRS agents with our staffing firm and convenient store clients.  When I software calculates the ratio to help us decide if there is an issue or not those clients are often times in the 80%+ range.  We have had to go to the auditor's supervisor on some of these to get them to back down on making all terms 100% vested.  By the auditor's logic those industries can't have anything but a 100% vesting sch.

One last observation:  Since this is a facts and circumstances determination you need to at least be open to the idea of a 15% or 10% RIF could be a Partial Termination.  RIFs at that level do get looked at less by the IRS as they focus on that 20% level for their presumption but the way the law is written a lower level could require 100% vesting.