Partial Plan Termination Rules

So lots of partial plan terminations imminent or in progress,.  We all agree that in this scenario, assuming it is a calendar year plan, anyone who terminates at any time in 2020 (and for any reason) must become 100% vested.  Is that correct? 

Seems like now would be a good time for someone to challenge the IRS to repeal that dumb interpretation.  Even if they solve the problem it will be too late.

Good luck with that...

but you agree with my initial observation, correct?

Maybe...   I've had to do a couple of these calcs over the last couple of years.  From reading the EOB, you take into consideration the involuntary and voluntary terminations and start to do the calculations.  I'm leaving out other details...….

Generally speaking, you look at the plan year as a whole.  It may be a little early in the year to determine if really a partial plan term occurred.  They may rehire back the terminated and squeak by on the percentage.

So yes, they might get 100% vested, but at what date?  I don't want you paying out at 100% and have that bite you in the end.

Why is it dumb? Because you think the IRS interpreted the rule incorrectly? Or because you think the rule itself is dumb? Or hard to efficiently / effectively manage? Especially when there are mid-year distributions? Just trying to understand. 

I think allowing folks to keep more of the money isn't really a bad thing in these uncertain times....

2 hours ago, justanotheradmin said:

I think allowing folks to keep more of the money isn't really a bad thing in these uncertain times....

No offense but that is of course easy to say when its not your money.  The business that just laid off 35% of its work force needs every penny to leave the lights on.

5 hours ago, Mr Bagwell said:

Maybe...   I've had to do a couple of these calcs over the last couple of years.  From reading the EOB, you take into consideration the involuntary and voluntary terminations and start to do the calculations.  I'm leaving out other details...….

Generally speaking, you look at the plan year as a whole.  It may be a little early in the year to determine if really a partial plan term occurred.  They may rehire back the terminated and squeak by on the percentage.

So yes, they might get 100% vested, but at what date?  I don't want you paying out at 100% and have that bite you in the end.

To be more clear,  you only take into account involutnatry terminations when determining if there was a partial term.  Then you fully vest anyone who terminates for any reason (thats the dumb part; the guy who quit for another job gets a windfall).

And because they have already exceeded the 20% threshhold, in this case by a wide margin, there is no way it could decrease from there.  

I am with austin here on the rule isn't a very good rule.  I am just not sure what to do about it.

I have seen cases were a company sold a division late in the year and those people exceeded 20% of the employees.  They were terminated.  I can see why they are made 100%.  But the rule would have someone who terminated months before that worked in another division become 100% vested. 

Even a person terminated for cause is made 100% vested.  

The idea that 20% turnover in a period sets up a rebuttable presumption that a partial termination happened is not a rule or regulation.  https://www.irs.gov/retirement-plans/partial-termination-of-plan

Without joining the debate about the IRS’s interpretation, I’ll observe this:  While a careful practitioner might consider reasoning explained in subregulatory guidance and in court decisions, one may render advice that interprets the statute and the rule using different reasoning.

I agree Austin, it's a goofy ride.  And it can be very subjective.

Personally I would not recommend getting the least bit aggressive on these rules.  The client does not have write a check.  And the costs of correcting if the Ira disagrees With you would be very costly if you used those forfeitures...

If my client asks for my advice, I can explain everything.  That might include warning an administrator that its interests, fiduciary and personal, might conflict with the employer’s interests.  And it might include inviting my client to evaluate soberly whether it has the resources and the appetite to fight a government agency.  Everything is fact-sensitive.  Some clients are comfortable with decision-making, including risk decisions.  Others ask “what would you decide?”  Even with them, I’m mindful that the client enjoys and suffers the consequences.

We had this situation a year or two ago.  Sponsor closed one site, so partial termination and full vesting resulted... no disagreement.  But this IRS "Issue Snapshot" was troubling... https://www.irs.gov/retirement-plans/partial-termination-of-plan

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Analysis

IRC section 411(d)(3) specifies that a plan will not be qualified unless it provides that, upon its partial termination, the rights of all “affected employees” to benefits accrued to the date of such partial termination, to the extent funded on that date, or the amounts credited to their accounts, are nonforfeitable.

The facts and circumstances determine whether or not a partial termination occurred under IRC section 411(d)(3). If a partial termination occurs, all participating employees who had a severance from employment during the applicable period must be fully vested in their account balance or their accrued benefit, to the extent funded.

Under Rev. Rul. 2007-43, the IRS established that a 20% or greater turnover rate in the applicable period creates a rebuttable presumption that a partial termination occurred.

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and...

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Affected Employee

IRC section 411(d)(3) and Treas. Reg. section 1.411(d)-2(a) require that upon a plan’s termination or partial termination the benefits accrued to the date of such termination or partial termination, to the extent funded, are fully vested for each affected employee. “Affected employee” is not defined in the Code or Regulations.

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Sponsor said participants who terminated earlier in the year, without knowing of the site closing or being affected by the closing, will not be fully vested.  We gave him all of this info, but he was adamant... rule is "dumb", and he'll fight it if he has to.

Bob Kaplan mentioned in the ASPPA webcast yesterday that the ARA is seeking relief for partial plan terminations if employees are rehired by December 31, 2020.  But isn't the applicable period for determining the partial termination the plan year?  Which would mean that for calendar year plans, that situation would already avoid the determination that a partial termination occurred. 

Rev. Rul. 2007-43 gives the guidance that the applicable period is the plan year, but could be longer.  It doesn't say anything about it being shorter.  Is this requested relief just for non-calendar plans?  Or does anyone think that the partial termination applies regardless of rehire in the same plan year?

I heard that too.  But based on the law today those people are 100% vested.  I just don;t see how you can change the determination after the fact. That seems like quite the cutback.  

Mind you we have to pay those people out today too. 

Is American Retirement Association seeking:

(1)  revised subregulatory guidance (which can't change the rule);

(2)  a revised rule (which likely could not be completed before 2020 ends unless the Treasury makes a sufficient finding of an emergency need, and still would be impractical recognizing that Treasury and IRS lawyers are needed to work on other projects);

(3)  a revised statute (which Congress readily can do)?

If the IRS would publish subregulatory guidance saying the 20% presumption does not apply regarding the coronavirus emergency, would that be enough help?

On 3/18/2020 at 4:54 PM, austin3515 said:

To be more clear,  you only take into account involutnatry terminations when determining if there was a partial term.  Then you fully vest anyone who terminates for any reason (thats the dumb part; the guy who quit for another job gets a windfall).

So how many are really affected and how much is this really costing your client (the guy getting the windfall)?  Someone there less than 6 years can't have that huge of an account balance. 

I'm not trying to be nasty or snarky, but imagine you work for the IRS in whatever department gets to give this guidance.  People (like you) are constantly asking for details/specifics about how to handle certain situations.  So you come up with something that is somewhat reasonable; maybe it isn't perfect but at least it gives us some guidelines.  But you don't like how it works in certain situations so you want an exception or different guidance.  You (they) can't keep making rules on the fly.  Would you rather have less guidance and have to give an opinion to your client about how to handle this situation, not knowing if you're even close to what might be acceptable?  I say be happy with the reasonably bright line, deliver the bad news to the client, and you can hate on the IRS together.  At least you know where you stand. 

Austin, why do you think those participants are 100% vested today?  Can't we wait for the applicable period (the plan year) to end to determine the counts?  That would allow us to include rehires of the temporarily laid off as active participants.

I needed to decide today because I am paying everyone out today.  If I say no partial term today and they don't get rehired, then I have to go back and repay everyone which is a total disaster. 

That nd it was 50% of the workforce and the client is thinking that they will not be back by year-end. I might have held back if there was a chance.  But this is a seasonal business and their season is from now until June.  So the ship sailed for this year unfortunately.

I guess this is why you get paid the big bucks! This is a tough situation. I'd put this to the client and make it the client's decision:

1. Based on current regulations, it is my opinion that you should treat this as a partial plan termination. This is a "safe" approach.

2. If you wish to take a more aggressive approach, you could NOT consider it a partial plan termination, and hope for some IRS guidance/relief that will allow you to have the result you want.

3. This is your decision. I'm not allowed to give you specific legal advice.

Good luck!

Let’s ask ourselves a follow-up question:

The Consolidated Appropriations Act, 2021, in its division EE, title II, § 209 provides:  “A plan shall not be treated as having a partial termination (within the meaning of 411(d)(3) of the Internal Revenue Code of 1986) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.”

Imagine a situation in which a plan’s administrator in 2020 assumed a partial termination and paid distributions in amounts more than what otherwise would have been the distributees’ nonforfeitable accounts.  Imagine that, unlike the situation austin3515 described, there are enough rehires before March 31, 2021 so there was no partial termination in 2020.

May the plan’s administrator demand that a distributee return the overpayment?

If it may, should the administrator ask?

How much does it matter that a distributee might not have known she was overpaid?

How much does it matter that the overpayment might have resulted from the administrator’s good-faith belief that there was (or would be) a partial termination?

If both payer and payee are innocent, what outcome is fair or equitable?

1 hour ago, Peter Gulia said:

May the plan’s administrator demand that a distributee return the overpayment?

If it may, should the administrator ask?

How much does it matter that a distributee might not have known she was overpaid?

How much does it matter that the overpayment might have resulted from the administrator’s good-faith belief that there was (or would be) a partial termination?

If both payer and payee are innocent, what outcome is fair or equitable?

Very real world scenarios that we are currently dealing with.  We've taken the position that it is an "overpayment" and you need to ask for the money back.  There is a correction for when an overpayment occurs - but it is based on money the participant would have gotten eventually anyway.  Here, they weren't vested, and may never become vested, so what is the correction?  This could be the case often where the employer lays off people, but hires different people to fill the slots.  The act doesn't say you have "rehire" to take advantage of the relief - only that your employment level be greater than 80% of what it was....

It depends.  What documentation do you have/do for any partial termination?  Got an amendment that declares 100% vesting for certain terminees?

To answer David Rigby's question, assume for my hypo that there was no amendment of any plan document; rather, there was only the plan administrator's finding that the facts and circumstances, as the administrator understood them before directing the distributions, were a partial termination.  And assume the administrator made that finding without waiting for calendar plan year 2020 to end.

MoJo, thank you.  Others' ideas?

I agree with Mojo. In my simplistic viewpoint on this, it is just an overpayment due to an incorrect calculation of vesting percentages. No different from a situation where someone should have been (x)% vested, and instead was incorrectly paid 100%. Same correction.

Good luck getting the money repaid from people who weren't rehired. (And even some who were.) Some may, but my experience is that for most employers, the hassle (unless the amounts are really large) is such that after the initial communication, they quickly determine that the amounts cannot be collected without excessive expense or aggravation, and they just pony it up themselves.

I'll take the opposite position. Whether by amendment or administrative action, the participants were paid what they were entitled to after giving consideration to either the document or the policy. There is nothing to repay there is nothing to correct. And, in fact, if you are successful in getting money back from a payee, the plan has violated 411d6.