The concept of a partial plan termination arises from Internal Revenue Code regulations designed to protect accrued benefits of plan participants. For a plan to maintain its qualified status, it must provide that upon the termination or partial termination of the plan, the rights of each affected employee to benefits accrued to that point are non-forfeitable. If a partial plan termination occurs, the protected benefits provisions of Section 411(d)(3) apply to the part of the plan that is terminated.
A Partial Plan Termination May Occur If:
- A group of employees who were previously included in the plan are now excluded, whether due to a plan amendment or due to severance by the employer; or
- Amendments made to the plan adversely affect the vested benefits of participants.
Although the final determination of whether a partial plan termination has occurred depends on the facts and circumstances of the particular case, there is a presumed partial plan termination when the turnover rate is 20 percent or higher.
How Is the Turnover Rate Calculated?
RATE
- Participating employees: includes both vested and nonvested participants but generally does not include eligible employees who have not entered the plan.
- Employer-initiated severance from employment: includes any severance that is not on account of death, disability, or normal retirement, including severances due to factors beyond the employer’s control, such as economic conditions. However, this does not include severance on account of a transfer to a different entity under the same controlled group if the employees continue to be covered by a plan that is a continuation (spin-off) of the previous plan.
- The applicable period is generally the plan year, but it may be a longer period if there is a series of related severances from employment.
We Calculated the Turnover Rate to Be 20% or Higher. Now What?
There is a presumption that a partial plan termination has occurred. This presumption may be rebutted in certain circumstances, such as:
- The employer can provide sufficient evidence to show that the turnover rate is 20 percent or higher due to purely voluntary severance.
- The employer can provide sufficient evidence to show that the turnover rate is routine, considering turnover rates in other periods and the extent to which terminated employees were replaced with new employees in the same roles.
If these circumstances do not apply, then the presumption of a partial plan termination stands. This means that affected employees must become fully vested in their accrued benefits, regardless of the plan’s vesting schedule. Although “affected employee” is not legally defined, it is generally understood to cover all participants who terminated during the applicable period, including those who terminated voluntarily. If affected employees have already incurred forfeitures when it is determined that a partial plan termination occurred, it is the employer’s responsibility to restore improperly forfeited benefits.
Our Plan Has a Safe Harbor Provision and/or Employer Contributions Are 100% Fully Vested Immediately. Does This Impact Us?
If all balances in the plan are 100 percent vested, then a partial plan termination may have no impact on the plan’s operations. However, it is important to consider vesting schedules that may have previously been in place. For example, even if the only employer contributions being made now are 100 percent vested safe harbor contributions, some participants may still have unvested balances in their accounts from a profit sharing or other employer contribution that was previously being made in the Plan and was subject to vesting.
Disclosure
Although we as auditors are happy to provide resources and information regarding partial plan terminations, it is ultimately management’s responsibility to perform (or delegate to competent service providers) the turnover rate calculation and determine if a partial plan termination has occurred. To maintain our independence as auditors, we cannot take on this management responsibility. Please reach out to your third-party administrator, recordkeeper, or ERISA counsel for assistance, as needed.
