Partial Termination and Plan Merger

[CMC]

My question has to do with how the partial termination rules apply following a plan merger.  Buyer is acquiring seller.  Some of seller's employees will be let go -- some in 2021 and likely more in 2022.  Seller's 401(k) will be maintained for the balance of 2021 and then merged into buyer's effective 1/1/2022.  So some of the terminations will happen while seller's plan is free-standing and others will happen after the plans are merged.  Question is, assuming there would otherwise be a need to assess whether there has been a partial termination by aggregating terminations across the 2 plan years, does the plan merger help prevent a partial termination in a some way?  Is there an argument that the seller's plan goes away when it is merged so you don't have to consider the 2022 terminations at all?  Or, if not, does the plan merger at least make the 20% threshold harder to hit because the denominator grows when the plans are merged?  Would appreciate your thoughts.

[CuseFan]

Good questions. I think you look at the merged plan for 2022. 

Bigger picture - consult with buyer to do the right thing and fully vest people losing their job as result of the transaction regardless.

[EBECatty]

Interesting, and I don't think you'll find any clear guidance. Partial termination is ultimately a facts-and-circumstances determination, so I think be reasonable, consistent, and probably err on the side of caution. I would lean toward vesting based on the layoff counts across 2021-2022 if doing so would clearly cause a partial termination in the seller's plan if left separate from the buyer's plan. 

To take an extreme example, seller's plan covers 100 employees and buyer's plan covers 1,000 employees. In December 2021, 15 seller employees are laid off. Turnover rate of seller's plan is 15% for 2021, so no presumption of partial termination. The plans merge 1/1/2022. In January 2022, 50 more seller employees are laid off. On the basis of the merged plan, your 2022 turnover rate is <5% (50 out of 1,085). However, when looking at the layoffs across 2021-2022 as the "applicable period" you have laid off 65% of seller's employees. My gut says vest them.

 

[david rigby]

I lean in a slightly different direction: give 100% vesting upon layoff.  At the very least, someone should crunch the numbers to determine how much $$ is involved.

[Mike Preston]

Does the recent statutory change to partial plan terminations affect this transaction?

[EBECatty]

Read literally, the relief would apply to the 2021 plan year, assuming the seller meets the March 31, 2021, 80% threshold. I have questioned previously whether the relief would ultimately cover a situation like this one (e.g., the seller here meeting the March 31 threshold but laying off a significant portion of its employees in December 2021). That clearly wasn't the intent of the statute, so perhaps the IRS will limit its reach somehow. 

But if you count the 2021-2022 layoffs together, I'm not sure it would give you any cover beyond December 31, 2021. The partial termination relief only applies to "plan years" that include March 13, 2020, through March 31, 2021. It doesn't change any other calculations or exclude 2021 terminations for any other purpose. So if you're looking at any time after December 31, 2021, it's not clear to me that the relief would change the calculation if the 2021-2022 layoffs are combined to form one non-plan year "applicable period" for partial termination purposes.