Partial plan termination plan still existing 6 years later

[SSRRS]

Hi,

A DB Plan was adopted for 2014. The only participants for 2014 were the owner and 1 employee.  The other 15 employees worked each year less than 1000 hours and were not eligible. In early 2015 this eligible employee terminated and was  0% vested, since did not have 2 years with at least 1000 hrs ( only 2014). 

Question: 1. Would this be a partial plan termination? 

2. If yes, would this one terminated employee become 100 vested?

3. Why should the owner be "penalized" and be forced to make this employee 100% vested just because there were only 2 participant's in the plan (and 1 terminated)?...... The plan is still in existence in 2022, 7 years later, (with the owner still the only participant) and there are no plans to terminate the plan, and calling this a partial termination is quite harsh.

4. What is the ramification if the terminated employee was removed from the plan (since at termination was 0% vested) instead of being kept in the plan and becoming 100%vested?

Thank you very much for any insights.

[Lou S.]

The presumption by the IRS is that you had a more than 20% reduction in eligible participants and a partial termination occurred, the result of which is 100% vesting of the affected participants.

However this is not a bright light test, but rather a facts and circumstance determination whether or not a partial termination occurred. You might be able to argue why a partial termination did not occur.  Evidence of a voluntary termination on the part of the participant might be helpful to your case that a partial termination did not occur.

As to why he should be "forced" the IRS doesn't write the rules with small plans in mind generally.

If a partial termination did occur and the participant benefit was forfeited when it should have been 100% vested you have a potential plan qualification issue.

[chc93]

With only 1 year of accrual, how large can the lump sum be?  Vesting to 100% couldn't be excessive, I would think... but would be the "safest", especially if a potential qualification issue arises.

[CuseFan]

If we were talking recent PYEs then I might be more concerned, but seven years down the road it's a safe bet (but won't say guaranteed) that this issue is dead and buried. Yes, it probably would have been safest to vest that person and pay them out, but to do that now might raise the dead, especially if the plan had been filing as an owner-only arrangement since then.

[SSRRS]

Thank you very much Lou, chc93, and CuseFan.