Partial Plan Termination?

[cheersmate]

Employer ABC sponsors a 401k plan. There are 3 participants. ABC sells practice location #1 of 2 to an employee Z (Non-HCE). The new owner Z does not continue the ABC Plan as a result of buying the practice location #1.

Is this a partial plan termination and should Z's account in ABC 401k be 100% vested?

[Peter Gulia]

Might these facts (and the rest of the situation) suggest that ABC has not really deprived Z of a reasonable opportunity to remain employed (perhaps by herself)?

 

[cheersmate]

Fuduciary Guidance Counsel, I have requested clarification on whether ABC was selling the location irrespective of who ultimately would purchase it and if Z would have been unemployed by ABC as a result. 

I find this to be particularly thorny. I don't believe the partial plan termination guidance is intended for this type of scenario ... but does it apply nonetheless?

Also, would your answer be different (or more definitive) if the sale also involved another staff member, let's call her X -- a receptionist - who would be left unemployed if the new owner of the location does not hire her? And if so, wouldn't this then trigget Z to also be 100% vested as a result of the event in totality?

Thank you.

[Larry Starr]

Slightly different way to look at it: I ask the client if they would LIKE the employee who bought the practice to be 100% vested.  In cases  like this, very often the answer is yes so we don't have a problem just doing the 100% vesting and then not having to worry what the IRS will think about it.  Has the client been asked if they would like the employee to be fully vested?

[cheersmate]

5 minutes ago, Larry Starr said:

Slightly different way to look at it: I ask the client if they would LIKE the employee who bought the practice to be 100% vested.  In cases  like this, very often the answer is yes so we don't have a problem just doing the 100% vesting and then not having to worry what the IRS will think about it.  Has the client been asked if they would like the employee to be fully vested?

The sponsor is not my client but his TPA said  blanketly "there is no partial plan termination" so it is not clear to me the sponsor has even been made aware of the potential issue... Z is my new client as she is establishing a new plan and in the course of our discussion I made the inquiry wrt her previous employer's plan.

[Tom Poje]

the question is "what %".

You indicated 3 persons.

ERISA Outline book has the following Chapter 4 Section XII Part B.1.e Acquisition of employees

1.e.2  Suppose that comp W does not agree to transfer the acquired employees account balances into its plan. In this case, the acquired employees vest in their account balances because the sale of these employees constitute a partial termination (over 75% of the employees)

[in the example it was a large % that was acquired. unknown what your % is. the general rule is if it is 20% that constitutes a partial plan termination]

[david rigby]

1 hour ago, cheersmate said:

… TPA said  blanketly "there is no partial plan termination" ...

Ask for reasoning, cite(s). 

[Peter Gulia]

Here's an IRS interpretation that describes the presumption about 20% suggesting a termination.

https://www.irs.gov/irb/2007-28_IRB#RR-2007-43

Beyond other uncertainties and ambiguities, one wonders how reliable a 20% presumption might be regarding a plan that has only three participants.

 

[cheersmate]

1 hour ago, Tom Poje said:

the question is "what %".

You indicated 3 persons.

ERISA Outline book has the following Chapter 4 Section XII Part B.1.e Acquisition of employees

1.e.2  Suppose that comp W does not agree to transfer the acquired employees account balances into its plan. In this case, the acquired employees vest in their account balances because the sale of these employees constitute a partial termination (over 75% of the employees)

[in the example it was a large % that was acquired. unknown what your % is. the general rule is if it is 20% that constitutes a partial plan termination]

Tom,

It is my understanding the 20% is part along with the facts and circumstances. And the 20% is a rule of thumb, as it may be a PPT with less than 20% or ot may not be a PPT with more than 20%, all depending on the F&C.

Purely numbers-wise, Z is 1 of 3 ppts in the ABC plan, so 33.33%. 

ABC the employer initiated the sale of the practice and location and Z happens to be the purchaser.

ABC retained its 401k plan and continues to do business in another location, and, Z's account balance currently remains in the ABC plan.

I believe it could be argued there has been a partial plan term based on the ppt headcount and the fact the employer initiated the sale of the location where Z was employed, hence Z's eventual termination. BUT where I believe this may be questionable and therefore seeking benefitslink's insight is the fact that Z purchased the portion of the business. 

[cheersmate]

8 hours ago, Fiduciary Guidance Counsel said:

Beyond other uncertainties and ambiguities, one wonders how reliable a 20% presumption might be regarding a plan that has only three participants.

Exactly part of my concern, along with the fact Z purchased the business location that was sold.

[Luke Bailey]

I agree with Fiduciary Guidance Counselor's basic approach in his first comment. You need to gather all the facts and circumstances you can and then ask yourself whether this was a situation where the break-up was really initiated by Z or by ABC. It may not be clear, but in the former there would probably not be a PT, in the latter, there probably would be. With situations this small, there are probably lots of personal dynamics at work and potentially ambiguities.

[cheersmate]

On 8/21/2018 at 5:40 PM, Luke Bailey said:

I agree with Fiduciary Guidance Counselor's basic approach in his first comment. You need to gather all the facts and circumstances you can and then ask yourself whether this was a situation where the break-up was really initiated by Z or by ABC. It may not be clear, but in the former there would probably not be a PT, in the latter, there probably would be. With situations this small, there are probably lots of personal dynamics at work and potentially ambiguities.

ABC initiated the sale, asking Z, his employee, if she would like to purchase it. ABC offered Z a proposal. Z never went to ABC and asked about a possible purchase.

There were approximately 7 employees at the location. It is my understanding only Z was eligible (others were part time or short service). Upon the asset sale to Z, ABC continued with his other 2 locations however did not offer any positions to any of the now terminated employees of the "sold" location.  Z at her discretion hired some (not clear to me if all) of those individuals. This was in 2017. 

As per 2016 5500 there are 3 participants. Z plus ABC owner and allegedly his wife. I can not surmise the 2017 headcount, but based on info wrt to the "sold" location census I do know of, it seems the 2017 headcount would remain unchanged. That being said, the participation would have decreased 33.33% as a result of the sale of the location.

At this time (2018) Z is at the beginning stages of establishing her own retirement plan.  When I asked about possible rollover funds, the matter of her previous employer's plan came to light.  She was recently provided her 2017 statement, and, it shows 60% vesting in the PS portion of her account. 

Given the above , do you believe the IRS would consider this a partial plan termination? Based on what I understand your comments to mean, I believe yes.  I would appreciate your thoughts given the above details.

Thank you everyone.

 

[Peter Gulia]

The real question isn't what the IRS might think if ever a question became presented to the IRS.  Rather, the practical question is what the ABC plan's administrator decides when Z submits her claim for a distribution.

If, as Larry Starr suggests, ABC wants Z to be 100% vested, there might be nothing to worry about.

Or if Z and ABC disagree about what Z is entitled to, one imagines they'll negotiate a solution.

 

[Luke Bailey]

Agree that no issue if want to 100% vest. Actually, you've got a 33.33% reduction and a "major corporate event," so probably is a PT.