H.R. Spotlight: Partial Plan Termination of your Employee Benefits

Thursday, April 16, 2009

Today’s economic times are challenging both financially and emotionally. Most individuals and businesses are experiencing the adverse affects of the tightening credit market, reduction in product demands and the stock market’s downswing. Many employers are strategizing on how to increase efficiencies and cut costs. One cost cutting measure that is becoming more prevalent is a reduction in workforce. However, most employers aren’t aware of how this option can affect their qualified retirement plan.

If there is a large enough reduction in workforce due to layoffs, those affected could become fully vested in their balances. This phenomenon is known as a partial plan termination.

The IRS generally assumes that a partial plan termination occurs if an employer’s turnover rate is at least 20%. This is determined by dividing the number of eligible employees affected by the employer-initiated severance(s) during the plan year by the sum of eligible employees at the start of the plan year and those added during the plan year. Voluntary terminations during the plan year are disregarded for these purposes.

When considering a reduction in workforce, it is important to maintain proper records as to the reasons behind the reduction. These reductions may occur in waves throughout the plan year that could eventually exceed the 20% threshold and fully vest some of those participants previously distributed.

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by Pat Metallic, CEBS
Greenwalt Sponsel & Co.
www.gscocpa.com

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