Blue Ridge ESOP Associates Industry News

Partial Plan Termination

Posted by Pam Themar

Jul 30, 2020 8:34:07 AM

Downgrade graphThe recent COVID-19 pandemic may have unfortunately caused your company to close a division or location or to lay off employees. One possible impact to your ESOP or 401(k) plan due to this reduction in workforce is whether a partial plan termination (PPT) has occurred. A partial plan termination can be triggered by a single significant event or by a series of smaller events.

A partial termination occurs if the reduction of workforce is significant and generally from involuntary terminations of employment. IRS Revenue Ruling 2007-43, states that a turnover rate of at least 20% of total participants assumes a partial termination has occurred. Facts and circumstances would need to be reviewed in each scenario, even when the turnover rate is above or below 20%. A good time to review the turnover rate for your plan is when the year-end census data is being reviewed by your Third Party Administrator (TPA). Your TPA can assist with the calculation and any related consequences.

The turnover rate is determined by dividing the number of participating employees who have had an employer-initiated severance during the applicable period by the sum of all participating employees at the start of the applicable period plus all the employees who became participants during the applicable period. You should include all vested and non-vested participating employees. Employer-initiated severance usually refers to all terminations other than those resulting from disability, death or retirement after normal retirement age, or any other voluntary separation by the employee. Voluntary terminations do not count in determining whether a PPT has occurred and it is the employer’s responsibility to show or verify that the termination was voluntary or involuntary. It’s important to note that any temporarily laid off employees are not counted in the totals unless they are not rehired by the end of the applicable period.

You may also be wondering what the consequences are for having a partial plan termination in your plan. The revenue ruling states that if a partial termination occurs during an applicable period, all affected participants must be fully vested in their accounts, regardless of the plan’s vesting schedule. The applicable period generally is the Plan Year. If you have a plan year that is less than 12 months, you would include the plan year plus the immediately preceding plan year. If there is a series of related terminations, then the testing period may be extended.

It’s important to consider all facts and circumstances when reviewing for a partial plan termination. If your company typically experiences turnover in excess of 20% then this year of the pandemic may not have caused a PPT in your plan. You should be tracking your turnover rates over a period of several years to help distinguish what is typical for your company. If you are experiencing a partial plan termination, then you must ensure affected former participants receive proper distributions from the plan or risk plan disqualification.

Topics: Partial Plan Termination