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Some Clarity For Partial Retirement Plan Terminations

As many retirement plan sponsors know, a plan may have a partial termination if more than 20% of the total plan participants are laid off in a particular year. Partial terminations can occur in connection with a significant corporate event such as a closing of a plant or a division, or as a result of general employee turnover due to adverse economic conditions or other reasons that are not within the employer’s control. Where a partial plan termination occurs, all “affected employees” must be fully vested in their account balance as of the date of a full or partial plan termination. They must become 100% vested in all employer contributions (including matching contributions) regardless of the plan’s vesting schedule.

A recent court decision stated that in order to qualify as a “partial plan termination,” reductions in work force over several years must be related to be considered together when deciding whether a partial plan termination has occurred. Specifically, the court stated that where a series of reductions in the number of participants in a retirement plan were not related, they could not be combined to determine whether a partial plan termination occurred.

In general, the court said that the period over which reductions in force may be aggregated to determine whether a partial plan termination has occurred is one plan year. However, the court previously conceded that corporate reorganizations or other significant events may not occur over the course of one plan year, so participant terminations in multiple years may need to be aggregated for consideration of a partial plan termination, but the multiple year terminations must be proven to be related.

The appellate court accepted a district judge’s decision that there was no overarching corporate restructuring plan—“that the decisions to sell particular subsidiaries had been made sequentially, on the basis of economic conditions in the particular market in which each subsidiary operated, and that these conditions had varied from market to market.” As such, the 7th Circuit determined the suit has no merit and affirmed the district court’s dismissal of the case.

This case may provide useful guidance to employers undergoing corporate reorganization and restructuring but is a good reminder that all corporate actions affecting retirement plans should be examined for partial plan termination issues.