Partial Plan Termination

I know there are discussions about this.

Have an employer who terminated 35% of participants. If this coronavirus situation improves by November, they may hire half of the terminees back. Apparently there is no special coronavirus exception to the partial plan termination rules.

This is a plan year determination so we really do not need to determine whether a partial plan termination has occurred until after 12/31/2020 in this case.The employees where all laid off on March 28.

Since these days most former employees want their distributions immediately, how are others handling this? My thought is if someone is 40% vested, they get paid their vested benefit now and if it is later determined that a partial plan termination has taken place, they subsequently get paid their remaining 60%. Does this seem reasonable?

What if it is later determined a partial plan termination has occurred and their remaining 60% was worth $20,000 when they received their distribution, but it turned into $10,000 by the time they received their subsequent distribution due to plan investment losses. )?

Thanks!

5 hours ago, Dougsbpc said:

I know there are discussions about this.

Have an employer who terminated 35% of participants. If this coronavirus situation improves by November, they may hire half of the terminees back. Apparently there is no special coronavirus exception to the partial plan termination rules.

This is a plan year determination so we really do not need to determine whether a partial plan termination has occurred until after 12/31/2020 in this case.The employees where all laid off on March 28.

Since these days most former employees want their distributions immediately, how are others handling this? My thought is if someone is 40% vested, they get paid their vested benefit now and if it is later determined that a partial plan termination has taken place, they subsequently get paid their remaining 60%. Does this seem reasonable?

What if it is later determined a partial plan termination has occurred and their remaining 60% was worth $20,000 when they received their distribution, but it turned into $10,000 by the time they received their subsequent distribution due to plan investment losses. )?

Thanks!

Seems to me it matters what the plan says about timing of distributions.  My plans mostly provide that payout occurs in the year FOLLOWING the year of termination and after the year end work is done (trustee directed, balance forward plan).  We are not planning on changing that and so far, in conversations with some clients, it has not been an issue. 

What does your plan say about timing of distributions?

The document indicates that the terminated participant shall be paid as soon as administratively feasible.

This is a self-directed account plan and all contributions have been funded.

Even though it appears as though they will have a partial plan termination now, we really will not know until after plan year end.

On 4/24/2020 at 4:33 PM, Dougsbpc said:

I know there are discussions about this.

Have an employer who terminated 35% of participants. If this coronavirus situation improves by November, they may hire half of the terminees back. Apparently there is no special coronavirus exception to the partial plan termination rules.

This is a plan year determination so we really do not need to determine whether a partial plan termination has occurred until after 12/31/2020 in this case.The employees where all laid off on March 28.

Since these days most former employees want their distributions immediately, how are others handling this? My thought is if someone is 40% vested, they get paid their vested benefit now and if it is later determined that a partial plan termination has taken place, they subsequently get paid their remaining 60%. Does this seem reasonable?

What if it is later determined a partial plan termination has occurred and their remaining 60% was worth $20,000 when they received their distribution, but it turned into $10,000 by the time they received their subsequent distribution due to plan investment losses. )?

Thanks!

Ok, now let's see if we can tackle the original questions.

First question: are they terminated or not. Nowadays, the phrase "furloughed" is used to reference an employee who is expected to come back; they are not terminated employees and sometimes benefits (such as health insurance) is continued.  On the other hand, laid off is often a euphemism for "fired", but it sound nice. What is the situation with your client. Are they really terminated?  There is no job being held for them to come back to?  They are supposed to be looking for jobs elsewhere because it is not expected they are coming back here?

The fact that they "want" their distributions immediately does not move me. Employees also want more money, more vacations, and more coffee (maybe!).  It is ok for the employer to "just say no".  So, if they are truly terminated and the plan says "as soon as administratively feasible", I would suggest that gives the employer a lot of latitude in the current situation.  Are they in the office? If not, it is NOT administratively feasible right now to do a distribution.  

But let's say it can be done, now your question is about vesting and the possibility of a partial termination.  Maybe it is, and maybe it's not. But that determination is made at the end of the year. So for now, if they are terminated and if it is administratively feasible to do the distribution now, then go ahead and pay the 40% of the current account balance. 

If it is determined that there is a partial term after year end, they their vesting gets bumped to 100% at that time and they are owed another distribution.  And the value of the account at that time may be higher or lower than it was at the time of the initial distribution, and that is normal and justified and the way it is. If the $20k left went down to $10k, then they only have $10k to be paid out.  And if  it went from $20k to $30k, do you think any of them will complain? 

In the case of individually directed accounts, it is customary when someone empties their vested dollars that the remaining amounts (the non-vested portion) is immediately either: 1) transferred to a "forfeiture" account which is invested in short term interest bearing funds; or, 2) the investments in the participant's account are moved into the same kind.  In any event, if the participant's funds need to be restored the amount restored is rarely diminished by a poor investment return.  Balance forward plans handle this issue with much more grace.

Dougsbpc, I think if your plan document says (as most of mine do) that the forfeiture occurs as soon as the ex-employee receives his/her lump sum distribution of his or her otherwise vested amount, and you are laying off 35% all at once, it's probably going to be difficult to not call that a partial termination. Sure, the person may come back, but are they really going to be able to buy back the forfeiture, even if they come back, say, in  August, 2020? No, most of them will forfeit, even if they come back and have a multi-year opportunity to buy back the forfeited amount, and it seems wrong for them to forfeit in that fact pattern.

If your plan says that the forfeiture is as of the end of the year, or the following year, or even better if you have a 5-year suspense account instead of the cashout and buyback,  you may have some leeway. The IRS's rules on what is a partial termination are not completely a bright line, and use the word "generally." Where you don't forfeit folks immediately and you bring most of them back before they haved a forfeiture, so that the number of employees who experience forfeiture as a result of the furlough is significantly below 20%, it would seem to me that in many situations you would be able to argue no partial termination. But each factual situation (including plan documents) will need careful examination in determining what to do, and with a cash-out and buyback plan you'd probably need to amend to in effect be a suspense account plan during the pandemic, because it will really not make sense to say there is no partial termination because they folks were only laid off for a short-time, but then when they come back they forfeit if they don't have the money to buy back in.