Spring 2009
Partial Plan Termination: When Workforce Reduction Leads to Full Vesting
The challenging economic environment is forcing many companies to shrink their payrolls through layoffs, sales of entire divisions and other means. At a certain point, these workforce reductions can trigger an Internal Revenue Service (IRS) rule mandating 100 percent vesting for affected employees. Failure to comply with this rule may result in a retirement plan losing its qualified status.
Generally, if a company reduces its workforce by 20 percent or more, the IRS considers this a “partial plan termination” and those former employees attain 100 percent vesting in their retirement accounts.
Even if the reductions occur over more than one plan year (for instance, multiple layoffs between 2008 and 2009 totaling 20 percent), the IRS may consider this to be a single event and apply the partial plan termination rule.
These questions will help determine if your retirement plan may be subject to this rule:
- Has the company recently experienced a 20 percent or greater workforce reduction?
- Was this reduction the result of an action by the employer (such as a layoff)?
If you answered “yes” to these questions, speak with your client service consultant at The Standard about the implications of the partial plan termination rule.
Keep in mind that distributions based on inaccurate vesting amounts may run afoul of IRS regulations. Your client service consultant can help determine the applicability of this rule to specific situations, as well as assess the legal responsibilities that accompany it.
