If your company has had a significant employer-initiated reduction in workforce and sponsors a 401(k) plan, it is important to consider whether a “partial termination” of the retirement plan has occurred. When a partial termination has occurred, all participating employees who had a severance from employment during the period must be fully vested in their accrued benefits, to the extent funded on that date, or in the amounts credited to their accounts.
Whether a partial termination of a plan has occurred depends on the individual facts and circumstances. However, a turnover rate of at least 20 percent over an applicable period gives rise to the presumption that a partial termination has occurred. The applicable measurement period depends on the circumstances: the applicable period is a plan year or a longer period if there are a series of related severances from employment. Exceptions are made for employers with traditionally high turnover rate, where annual turnover exceeding 20 percent is routine.
Since many facts or circumstances affect the determination of a partial plan termination, it is important to contact your plan attorney should your company experience a significant employer-initiated reduction in workforce.
Jonathan Poppel, CPA