As a plan sponsor, administrator, or trustee of an employee benefit plan, you are considered a fiduciary. Plan fiduciaries are subject to certain responsibilities which must be carried out in a prudent manner. One such responsibility of plan fiduciaries is to ensure that the plan is complying with the plan document, which serves as the foundation for plan operations. Failure to follow these basic standards of conduct could result in personal liability to restore any losses to the plan that are deemed to be the result of misconduct or failure to follow the plan document.
All qualified plans are required to include a provision in their plan document stipulating that upon full or partial termination of the plan, the rights of affected parties accrued to the date of such event and amounts credited to employees’ accounts are nonforfeitable. Although a complete termination of a plan is fairly obvious, a partial plan termination may not be so evident. If a partial plan termination occurs, all “affected employees” must be fully vested in their account balance or their accrued benefits, to the extent funded, as of the date of the partial plan termination. This includes becoming 100 percent vested in all employer contributions regardless of the plan’s vesting schedule. Now more than ever, this issue has become important as employers may have unknowingly created a partial plan termination due to cut jobs during the ongoing COVID-19 pandemic.
A partial plan termination occurs when there is a substantial employer-initiated turnover of employees. This may be the result of a significant event, such as a plant or division closure or as a result of adverse economic conditions or other events that are outside the employer’s control. In Revenue Ruling 2007-43, the IRS established that a 20 percent or greater turnover rate during a plan year (or longer if there are multiple terminations over a period of time-related to a particular event) creates a rebuttable presumption that a partial plan termination occurred. The determination of whether a partial plan termination has occurred is a legal matter, and the IRS ultimately determines whether a partial plan termination has occurred with regard to all facts and circumstances in a particular case. In some cases, a partial plan termination may occur even when the turnover rate is lower than 20 percent, such as in the case of a division closure that results in less than this percentage.
Determining whether a partial plan termination has occurred, turnover rate, applicable period, and affected employees can be very complex. It is highly recommended that ERISA counsel be contacted when it appears that a partial plan termination may have occurred. Additionally, plan fiduciaries should consider the following safeguards:
- Obtain a general understanding of partial plan terminations and the related rules
- Become familiar with the plan document
- Establish a written policy governing procedures for periodically monitoring employee turnover and reasons for turnover that may be indicative of partial plan terminations
- Implement protocol for delaying the allocation of forfeitures if it is suspected that a partial plan termination may have occurred
- Document the processes used to evaluate possible partial plan terminations, the conclusions reached, and any applicable action plans
The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, provided some relief from the partial plan termination rules during the COVID-19 pandemic. During any plan year which includes the period beginning on March 13, 2020 and ending on March 31, 2021, a plan shall not be treated as having a partial plan termination if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.
In summary, plan fiduciaries need to be aware of their fiduciary responsibilities; including partial plan terminations in order to avoid the pitfalls that can result from such unforeseen circumstances.