During your retirement plan’s annual year-end compliance testing, your recordkeeper will review employee terminations to determine whether the plan may have experienced a partial plan termination.
A partial plan termination is presumed by the IRS to occur when 20 percent or more of a company’s employees are no longer eligible to participate in the plan in a determined span of time (typically one plan year, but it can be other spans of time, based on facts and circumstances). In other words, generally, 20 percent or more of employees were laid off during the plan year for reasons other than routine turnover (i.e. closing of a company division, voluntary terminations, etc.). Routine turnover during the year is generally not considered a partial plan termination.
In order to determine whether your turnover rate is routine, you may want to consider the following factors:
- What was your turnover rate during other periods?
- During those periods, what was the extent to which terminated employees were actually replaced?
- Do the new employees perform the same functions as the previous employees?
- Do the new employees have the same job classification or title? Do they have comparable compensation?
If it is deemed that a partial plan termination has occurred, all affected employees must become 100 percent vested in their account balance as of the date of their termination. This also means that if any benefits have already been paid out, and employer dollars forfeited, the employee is entitled to those forfeited dollars, and the employer is responsible for making the employee “whole”.