Layoffs May Trigger 100% Vesting in Retirement Plan

Hershner Hunter, LLP
Employee Benefits Group

January 25, 2013

Employers working to stay afloat in these challenging economic times have one more thing to think about: layoffs and other employee terminations may result in a “partial termination” of the employer’s 401(k) plan or other retirement plan.

If a partial termination occurs, the plan must 100% vest the accounts of all affected participants. In essence, the plan is treated as terminated with respect to those participants.

There is no bright-line rule for determining whether a partial termination has occurred – it’s a facts and circumstances test. But IRS guidance provides that if there is a 20% or more turnover rate in the plan due to employer action, then there is a presumption that a partial termination has occurred. The presumption can be rebutted by showing that the turnover rate is routine.

If actions terminating participants occur over multiple plan years, then the turnover rate must be determined for the entire related period. For example, if an employer begins laying off employees during the 2012 plan year and continues to do so in 2013, the 2012 and 2013 plan years should looked at together. This may result in a turnover rate indicating a partial termination for the entire 2012-2013 period, even if the turnover rate in 2012 was less than 20%.

Often, an employer does not realize that a partial termination has occurred until after many participants have already received distribution of their plan benefits. Once participants receive distributions, it can be difficult to locate the participants because they no longer keep plans up to date on their current addresses. Also, questions arise about the administration of the cash-out and other distribution and consent rules, and possible misuse or misallocation of amounts that should not have been forfeited. These reasons underscore the importance of making a timely determination of whether a partial termination has occurred.

Please contact any member of the Employee Benefits Group with any questions about partial terminations, or any other issues relating to employee benefits.

Craig Smith
Everett Moreland
Jeff Kirtner

This article provides general information and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. If you have specific legal questions, you are urged to consult with counsel concerning your own situation.