Preparing for a Partial Plan Termination

Retirement Plan, Funds, Forfeiture Dollars

The IRS is actively pursuing plans that may have experienced a partial plan termination.

A partial plan termination may have occurred if you have experienced a substantial reduction in your workforce. Information on your Form 5500 filing may indicate a possible partial plan termination and may cause the IRS to investigate to ensure that proper procedures are being followed. The determination of a partial termination is a facts and circumstances test, but there are a few factors which serve as good indicators.

The first factor is the population of affected participants. If it is a class of participants, then there is a chance of the reduction being viewed as a partial termination. More commonly, the percentage of participants being affected will be scrutinized. Per internal IRS guidelines, a 20% reduction is generally considered “significant.”  Some ERISA attorneys state that a more conservative threshold is a 15% reduction in workforce. The percentage is determined by looking at the number of participants terminated by corporate action compared to all pre-corporate action vested and non-vested participants.

Voluntary terminations (terminations occurring in the normal course of business) and terminations due to death, disability, or retirement are typically not to be included in determining the percentage reduction.

Another factor to be considered is the period over which the terminations occur. The IRS generally includes all employer terminations within a rolling window unless the terminations can be proven to be unrelated to one another. In other words, the IRS will consider all terminations to be in accordance with a single downsizing plan unless proven otherwise. In addition, separate reductions in workforce may be combined in the determination of a 20% reduction.

In the event that a partial termination has occurred, all “affected participants”, or those that can no longer participate in the plan, must become 100% fully vested in their accounts on the effective date of the partial termination. All other “non-affected” participants continue to participate in the plan in accordance with the plan’s vesting provisions. If an absolutely definitive determination of a partial termination is desired, a plan sponsor may file a Form 5300 with the IRS, although this action is not required.

ACR#136588 02/15