Partial Terminations: A Facts and Circumstances Test (Posted January 8, 2004) Technical Tip 112: The following question and answer were from the IRS Q&A Session at the 2002 ASPPA Annual Conference: Regarding partial plan terminations, in a plan with a two-year vesting (50% per year of service), what are the facts and circumstances that the IRS would take into account if the reduction in the work force was between 20% to 30% of employees during a one-year period? Response: Whether the terminations were voluntary vs. involuntary would be the most significant factor. We would also look at the numbers of more than one year in some circumstances. A review of the audit guidelines is suggested for more details. Comment by the RLR&C ERISA Attorneys: Generally, a partial termination of a qualified plan occurs when a significant number of employees covered by the plan are excluded from coverage either as a result of a plan amendment or their discharge by the employer. According to relevant IRS regulations, determining whether a partial termination has occurred is a facts and circumstances test. The effect of a partial termination is that all participants affected by the termination become 100% vested in their retirement benefits. The audit guidelines referenced in the IRS's Answer may be found in the Internal Revenue Manual ("IRM") (available on the IRS's website at www.irs.gov). IRM Part 7, Chapter 12 provides the guidelines for plan terminations, including partial terminations. In addition to whether the terminations were voluntary or involuntary, as indicated above, the facts and circumstances the IRS will consider in determining whether a plan has suffered a partial termination include the potential for a reversion to the employer and the extent to which terminated employees are replaced. Additional facts and circumstances include the number of employees terminated in light of the employer's normal turnover rate and whether he terminations result in an increase in prohibited discrimination. These factors may be reviewed individually or collectively over a period of one or more years. View all Tips © 2008 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.