Partial Plan Termination

[401(k)athryn]

I have a client that experienced a partial plan termination in 2018 because more than 20% of eligible employees were terminated involuntarily.  This year, I have continued to receive withdrawal requests and have determined that, if I were to make a partial termination determination based upon January - April 2019, it would be a partial term and these 2019 terminated employees should be fully vested.  It is possible that there will be enough new plan entrants throughout 2019 to have a result that it is NOT a partial term based upon the full year.  I am hesitant to wait until the end of year, as I normally would, because I don't want to have to reinstate forfeitures when that could have been avoided. 

Does anyone make partial termination determinations throughout the year (if you have a reason to suspect a partial term) or do you always look at the plan year?  In my case, it is not a single event where people are laid off or a division shut down.  I would not say that these are related to the 2018 lay offs, either.

[C. B. Zeller]

Rev. rul. 2007-43 defines the applicable period:

Quote

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.

So it does not appear that there is any basis for using a period shorter than a full plan year for determining whether a partial plan termination has occurred.

Note that turnover rate >20% only defines the presumption of a partial termination. Whether or not an actual partial termination occurred is based on facts & circumstances. 

The best way to handle the situation might be to have the employer adopt a resolution explicitly stating that they are treating the period between 1/1/2019 and 4/30/2019 as a partial plan termination and any participants who were involuntarily terminated during that period will be fully vested. 

[401(k)athryn]

Thank you!  I am sure they don't want to fully vest these participants if there is even a small chance that it will NOT be a partial term based upon the full year.  I suppose I just need to allow balances to forfeit and make sure the plan sponsor does not use them before a final determination has been made.

[ESOP Guy]

I must disagree in part here. 

Read what the IRS website says here:

https://www.irs.gov/retirement-plans/partial-termination-of-plan

I quote under the heading "Applicable Period":

Typically the period is one plan year, but can be longer if there are a series of related severances from employment. If there is a short plan year, the period includes the short plan year and the immediately preceding plan year. In the above example, the applicable period may include plan year 2012, since the form indicates that 22 were dropped.

 

So if the early 2019 layoffs are part of a related series of severances I think you MUST include those people as part of the partial-termination.   I believe the courts have upheld this position of the IRS' that you don't just look at plan years.  You look at the layoffs in total.  In fact as I have understood this if 13% were laid off in late 2018 and another 15% were laid off in early 2019 if you went by plan year you would say no year had 20% and the IRS would object.  They could say they are a related series of severances and you have a partial termination in both years.  

Maybe someone else can give other cites but I think you should do more research.  But if the terminations are basically caused by the same down turn in business I think there is an excellent chance you have a partial termination here. 

The amendment (which it sounds like they don't want to do) to make them 100% vested would be safe.  

[ESOP Guy]

No, I don't know how to reconcile the IRS website and their own Rev Rule.   I am just telling you what I do know.  

[401(k)athryn]

All of the 2018 involuntary terms occurred on the same date in October, so that was a clear "event".  So far, this year, I have 2 involuntary terms on 1/15/2019 and 2 on 1/31/2019 and none after that.  I do not believe that those January terms would be considered part of the 2018 partial term, although I know business has consistently not be good since last fall.

[shERPA]

Unless you've been engaged as a plan fiduciary, it's really up to the employer to make the partial termination decision.  Explain the guidance, explain the concept of a series of related severances, explain the cost of a partial term and the consequences of getting it wrong.   Let them make the decision.  

[Calavera]

Also keep in mind that at least for 2018 all terminated has to be 100% vested, not just those who terminated in October.

[chc93]

3 hours ago, Calavera said:

Also keep in mind that at least for 2018 all terminated has to be 100% vested, not just those who terminated in October.

But isn't this based on the IRS website "explanation", and not supported in Rev Rul 2007-28.

(IRS website https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-partial-plan-termination)

"An affected employee in a partial termination is generally anyone who left employment for any reason during the plan year in which the partial termination occurred and who still has an account balance under the plan. "  (emphasis mine)

Rev Rul 2007-28...

"... number of participating employees who had an employer-initiated severance from employment..."

"... Employer-initiated severance from employment generally includes any severance from employment other than a severance that is on account of death, disability, or retirement on or after normal retirement age..."

No mention of *anyone* who terminated for *any* reason..

 

[Luke Bailey]

401(k)athryn, you have received excellent advice above. As you can see, there is unlikely to be a clear answer and it is probably not your role to have to take the risk on this. Punt if you can.

[401(k)athryn]

Thank you, all!

[Calavera]

Rev. Rul. 2007-43

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.

[Mike Preston]

Just for kicks, what other type of partial termination is there?