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plan termination and vesting of terminated participant


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Working on the 2018 valuation for a balance forward profit sharing plan, I found out the company was sold in 5/2018 and technically the plan should have terminated as of that date.  No one notified us of the sale of the company, 

A terminated participant was paid out in 3/2018 at 40% vested.  They terminated in 2017.  Since he was paid out prior to 5/2018, should he forfeit his non-vested balance at 12/31/2018 or be made 100% vested and paid out the remainder?    

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You might want to check both the plan termination amendment (if one exists since no one was told about the sale) and plan document.

Some of my documents say a person fully paid forfeits on that day.  I have seen a few that don't say when they forfeit.  I have seen a few that say they forfeit on the valuation date.  But I do have lots of documents that actually say what day the person forfeits when fully paid. 

If it says forfeit on date of payment I think your fine.  If it says forfeit on the valuation date I would say this person got a windfall.   If it doesn't say when well I lean towards Bird's answer but you can see how the issue could be raised. 

This is one of these issues where a well drafted document can help a lot.  I love when it says they forfeit as of the day they were fully paid.   It gives you a nice bright line to look at in this situation. 

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… the plan should of (sic) terminated ...

At the risk of going off target, there have been many questions posed on these Message Boards that misuse the word "sold".  If the company was sold (complete stock sale, not asset sale), that does not require the plan to terminate (probably), and may not result in a plan termination.  The original poster should make sure to know the true nature of the transaction.

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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Unfortunately, intentions don't terminate a plan, actions do.  With a stock purchase, if the plan wasn't terminated, it belongs to the new owner now.  If the new owner terminates the plan, there is guidance on your vesting question in GCM 39310. 

There could also be fiduciary issues if partially vested participants are paid while the plan termination is under serious consideration, but not yet in effect.   

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Did anyone check the sale and purchase agreement? Typically, the disposition of any employee benefits plans is part of the normal due diligence process, and the sale and purchase agreement would specify what is happening to the plan(s) and who is responsible to do it. At least in theory.

But that may not help. What Kevin said!

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Assuming the plan does terminate, or a partial termination occurred so that in either event full vesting is required, the issue turns on whether the participant still had an account. I think ESOP Guy's analysis is correct. If the plan doc says that the forfeiture occurs as soon as the lump sum is paid, then he did not have an account. If, however, the plan document states that forfeiture occurs as of end of plan year, or even worse if the plan document has 5-year suspense account rule, the participant had an account and should be fully vested.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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