Partial Plan Termination

A company had a layoff where 30% of their employees were let go in February 2019, so it's a clear partial plan termination and they will be 100% vested. IRS guidance seems to indicate that any other participants who leave the company during the same plan year, even voluntarily, would also become 100% vested. Is that correct?

"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."

Yes, that is my position.

Don't overlook the value of an amendment to document this.  Even if it's administered correctly, it is useful to have adequate documentation so all understand what/why/when.

50 minutes ago, david rigby said:

Don't overlook the value of an amendment to document this.  Even if it's administered correctly, it is useful to have adequate documentation so all understand what/why/when.

We would not do an additional amendment; our plan language always include a provision for 100% vesting on partial or full plan termination.  You might want to memorialize the fact that you fully vested some people due to a partial termination. We would do so in our cover letter for the valuation report for that year.

7 hours ago, khn said:

A company had a layoff where 30% of their employees were let go in February 2019, so it's a clear partial plan termination and they will be 100% vested. IRS guidance seems to indicate that any other participants who leave the company during the same plan year, even voluntarily, would also become 100% vested. Is that correct?

"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."

I don't think that position would be upheld if challenged. But I recognize that others might feel this is too aggressive. 

4 minutes ago, Mike Preston said:

I don't think that position would be upheld if challenged. But I recognize that others might feel this is too aggressive. 

I think the bigger issue would be is it worth to challenge?   There would have to be a lot of unvested money at stake to make a court case worth the time. 

Even in my large clients the difference between between vesting those directly effected by the Partial Termination and everyone termed just isn't that large amount of money.  It rarely breaks the $10k mark in my experience.  I mean the people with the largest balances tend to be 100% vested already.  

1 minute ago, ESOP Guy said:

I think the bigger issue would be is it worth to challenge?   There would have to be a lot of unvested money at stake to make a court case worth the time. 

 

Even in my large clients the difference between between vesting those directly effected by the Partial Termination and everyone termed just isn't that large amount of money.  It rarely breaks the $10k mark in my experience.  I mean the people with the largest balances tend to be 100% vested already.  

Tru Dat. 

khn, the controversy as to the validity of the IRS's position, touched on above, has been discussed elsewhere, at somewhat greater length, in this forum. You should search the "partial termination" subject on this forum if you want to explore in greater depth.

And here is the commentary from Sal:

1.a.8) Who vests when a significant reduction in participation occurs?. The law says that employees who are “affected” by the partial termination become vested. Who is considered “affected” by a partial termination that arising from a significant reduction in participation? In Rev. Rul. 2007-43, the IRS states the following: “f 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 case of a defined contribution plan, in the amounts credited to their accounts.” (An “applicable period” for this purpose means a period for which a partial termination has occurred.) Since the IRS refers to all participating employees who had a severance from employment, apparently, the IRS believes that even employees who voluntarily sever from employment during the applicable period get the benefit of the accelerated vesting triggered by the partial termination, even though voluntary terminations are not taken into account in determine whether the reduction in participation is significant. This apparent interpretation is borne out in an FAQ posted at the IRS website stating such a position. See http://1.usa.gov/1xZ6TWc. The IRS’ position seems to be contrary to the intent of the partial termination rules, but we are not aware of any successful challenges to the IRS’ position. At one time, it was reported that the IRS had been training agents to require only the involuntarily-terminatedparticipants in the applicable period to become 100% vested on account of the partial termination. However, more recently, the IRS has apparently started enforcing this interpretation. Unfortunately, many employers have accepted the IRS interpretation on the basis that the funds involved are not significant and the cost of fighting the IRS is not worth it.