Beware! Layoffs and RIFs May Constitute Partial Plan Termination

Partial termination of a retirement plan can happen for reasons ranging from merging with another company to voluntary termination. Laying off a large enough portion of one’s workforce, due to a reduction in force or other reason, can result in a partial plan termination, something the business may want to avoid.

What Creates a Partial Plan Termination?

When layoffs impact more than 20% of total plan participants in a given year, there may be partial plan termination. This can occur due to closure of a division, adverse economic conditions, or other reasons outside of the business’s control. Another triggering event for partial plan termination is a change to the plan through an amendment that either excludes or adversely affects the vesting schedule of more than 20% of total plan participants.

As a general rule, however, if a business experiences regular turnover of this percentage of their workforce, then the plan is likely not considered subject to partial termination. If the turnover is consistent with previous years, the new employees replace the same functions, job classification, or job title as the departing employees, and the wage or salary is similar, then it is likely considered regular turn over.

Who is an Affected Employee?

When there is a partial termination, all “affected employee” account balances must be fully vested, including all employer and matching contributions, regardless of the plan’s vesting schedule. An employee is anyone who no longer works for the business, for any reason, and left during the plan year in which the partial termination occurred, regardless of whether they were part of a major lay off or RIF.

Some of the affected employees will require accelerated vesting due to a partial termination, and improper forfeitures will result in employees being entitled to further benefits. If forfeited amounts have already been distributed to other participants, then the business is responsible for making the affected employee whole.

Helping clients identify and avoid potential complications such as partial plan termination is a fraction of the work the benefits attorneys at Hall Benefits Law perform. To learn more about the services we offer, reach out to our team by calling 678-439-6236 or visiting the Hall Benefits Law website.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.