Many qualified retirement plans apply vesting schedules to employer contributions. Those schedules normally provide that a participant’s benefit vests—or becomes non-forfeitable—over a period of time or at a specific time permitted by ERISA (the Employee Retirement Income Act of 1974, as amended). There are, however, exceptions that require a participant’s benefit to become fully vested. One of these exceptions is when the plan terminates. Another is when the plan partially terminates.
Whether a partial termination has occurred depends on the facts and circumstances, including the extent to which participating employees have had a severance from employment. Based in part on a 2004 Appeals Court decision in Matz v. Household International Tax Reduction Investment Plan, the IRS ruled there is a presumption of a partial termination if the employee turnover rate is at least 20 percent. It further stated:
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. An employer-initiated event includes a sale of a portion of the company, layoff or other business re-structuring.
The IRS did not, however, adopt language in the Matz opinion that below 10 percent, the reduction in coverage should be conclusively presumed not to be a partial termination and above 40 percent, it should be conclusively presumed to be a partial termination.
In a recent opinion by the same Appeals Court in the Matz case, the conclusive presumptions were again put forth although they were not necessary for the holding in this new opinion. In other words the language is considered dicta. The Court did find that, contrary to the plaintiff’s allegations, a series of corporate transactions that occurred over several years were not related or carried out pursuant to a single plan. Therefore, the employee terminations that occurred over a period of multiple years should not be aggregated to determine whether a partial termination occurred.
This recent appellate court case indicates that the scope of the presumption of partial termination may not be settled and may be broader than set forth by the IRS. It also confirms that whether or not a partial termination has occurred is a very factual determination that will vary from case to case. Therefore, any client considering a layoff, sale, merger or other business restructuring, would do well to contact their plan consultant for advice on whether a partial termination may occur as a result of the transactions.
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