Factors to Consider Regarding Partial Plan Terminations

Tip of the Day

By Stephanie Reagan


Code Sec. 411(d)(3) calls for 100% vesting upon the partial termination of a plan for the folks that had an employer-initiated severance. It does not define a partial termination. Whether or not a partial plan termination occurs is to be determined on the basis of all of the facts and circumstances of a particular case.

Rulings handed down by the courts and the IRS have set forth parameters regarding what corporate action(s) results in partial plan termination. Factors to consider when determining whether a partial plan termination has occurred are as follows:

  • Significant-percentage-of employees test.  

Partial plan terminations are calculated using the ratio of all terminated plan participants to total plan participants.  Generally, a partial plan termination will occur if a “significant percentage” of employees is excluded from participation in the plan either by reason of plan amendment or by discharge from employment.

  • The 20% rule.

The Seventh Circuit has adopted a rebuttable presumption that a 20 percent or greater reduction in plan participation is a partial termination, while a reduction under that threshold is not a partial termination. A reduction in coverage below 10 percent would be conclusively presumed not to be a partial termination. A reduction in coverage above 40 percent would be conclusively presumed to be a partial termination.

Rev. Rul. 2007-43 states that "If the turnover rate is at least 20 percent, there is a presumption that a partial termination of the plan has occurred. The turnover rate is determined by dividing the number of participating employees who had an employer-initiated severance from employment during the applicable period by the sum of all of the participating employees at the start of the applicable period and the employees who became participants during the applicable period. The applicable period depends on the circumstances: the applicable period is a plan year (or, in the case of a plan year that is less than 12 months, the plan year plus the immediately preceding plan year) or a longer period if there are a series of related severances from employment."

In determining the numerator of the rate you include all terminated plan participants, both vested and non-vested. 

Did you know that you don't have to include the following employee terminations in the numerator of the fractions?

o   A severance that is on account of death, disability, or retirement on or after normal retirement age.  

o   Voluntary severance from employment  - This can be supported through items such as information from personnel files, employee statements, and other corporate records.

o   Transfer to a different controlled group if those employees continue to be covered by a plan by the new employer.

o   Terminated employees were actually replaced.  Whether the new employees performed the same functions, had the same job classification or title, and received comparable compensation are relevant to determining whether the turnover is routine for the employer.

o   Participants who voluntarily take early retirement through early retirement window programs  (Halliburton Case)

Final note - It is important to review the participant count information in Form 5500 lines 5 and 6. If there is a drop of participants of say 15% or more, the plan sponsor either:

  • Has determined that a partial plan termination has occurred and has vested the participants that had employer-initiated severance, or
  • Should document the facts why the plan did not have a partial termination. The facts should support the employee terminations that fit the above listed exclusions and aren't employees who had an employer-initiated severance.

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