Downsizing Can Cause Partial Plan Terminations


By Mara Bruce

The economic downturn that began in December 2007 forced many companies to downsize, cutting their workforces, closing plants and leaving many unemployed. We can’t soon forget that the jobless rate in 2009 was the worst any of us have seen in a number of decades. Looking forward in 2010, the jobless rate is not expected to change dramatically. If enough employees are terminated, a partial plan termination could result.

When a partial termination occurs, all terminated participants become fully vested in their account balance based upon the date of the partial termination. To avoid administrative issues, it’s important to identify a partial termination when it occurs rather than a few years later. For instance, if a defined contribution plan is deemed partially terminated and nonvested benefits have been forfeited, an employer would be required to make the participants whole for the forfeited account balances when discovered.

Judgment is involved in determining if a plan has been partially terminated. There are various circumstances and facts that may come into play and need to be analyzed to determine if this has occurred. In general, if a workforce has been reduced by the employer by at least 20% and plan participation has also been reduced by 20% a partial plan termination is possible.

With the downturn in 2008 and 2009, there is the potential that this could have happened to some plans already and the potential to occur in 2010. An employer who is facing a situation of reducing its workforce should review all the facts and circumstances with their benefit plan consultant to determine their appropriate course of action. 

 Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.


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