If downsizing or significant layoffs occur at your business, your retirement plan could be subject to a partial plan termination. The following discusses partial plan termination rules.
What Is A Partial Plan Termination?
Generally, a partial plan termination occurs when the turnover rate for benefit plan participants is at least 20% in a given plan year (plan years are usually the period considered). You can find the turnover rate formula, as defined by IRS Bulletin 2007-28, at the link below, under Analysis section.
Internal Revenue Bulletin: 2007-28 – https://www.irs.gov/irb/2007-28_IRB/ar08.html
For 401(k) plans, the turnover formula also includes participants that are eligible, but do not make salary deferrals.
What Is Considered As Employer-Initiated Severance?
The IRS Bulletin above describes employer-initiated severance. The Bulletin details that severance is employer initiated if it does not result from death, disability or retirement on or after normal retirement age. It is an employer-initiated severance even if the cause is external events, such as economic recession.
The IRS acknowledges that some employees initiate termination voluntarily; and therefore, would not factor into the calculation of turnover. However, an employer must have supporting detail files for this voluntary separation.
What Are the Requirements Once Partial Plan Termination Has Occurred?
Partial plan terminations require that separated employees become 100% vested in their account balance at the date of the partial plan termination, both employer and employee portions. This requirement is without regard to the plan-vesting schedule. If an employee forfeited a prior non-vested amount in the plan year when a partial termination occurs, the company will need to re-pay this amount to the participant.
It is important to note, that the IRS considers facts and circumstances in each partial plan termination. See the frequently asked questions link on the IRS website: https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-partial-plan-termination
Regardless of the cause – downsizing, restructuring, offshoring, etc., partial plan terminations can occur. If you have questions, we encourage you to contact Scott Esworthy on the BSSF Employee Benefit Plan team.
ABOUT THE AUTHOR
Scott is a Principal with BSSF, specializing in the audits of property and casualty insurance entities (P&C) and employee benefit plans. His expertise in these areas extends beyond the Central PA region. Scott and his team serve clients in the Mid-Atlantic Region, with a focus in Pennsylvania, New Jersey, Maryland, Delaware, Virginia, Ohio, and New York.