IRS Revenue Ruling 2007- 43 addresses Partial Plan Terminations. It provides a specific fact set that demonstrates that if 20% or more of Employees leave a job involuntarily, then a partial termination has presumably occurred. The IRS continues to assert the 20% standard, even though it has not always prevailed in court.

Partial Plan Terminations; Revenue Ruling 2007-43

If a partial plan termination occurs because of employee turnover during an applicable period, all affected Participants who had a severance from employment during the period must become fully Vested in their accrued benefits credited to their accounts. Whether a partial termination of a plan has occurred as described by IRC § 411(d)(3) depends on facts and circumstances, including the extent to which participating employees have had a severance from employment. When the employee turnover rate is at least 20%, the IRS presumes that a partial termination has occurred. In Revenue Ruling 2007-43, the IRS describes the process for including and excluding participants taken into account for determining whether the 20% level has been met or exceeded.

Turnover rate. According to this revenue ruling, if the turnover rate is at least 20%, there is a rebuttable presumption that a partial termination of the plan has occurred. (However, the fact that the turnover rate is less than 20% does not create a presumption that a partial termination has not occurred.) The turnover rate is determined by dividing the number of participating employees who have had an employer-initiated severance during the applicable period by the sum of all of the participating employees at the start of the applicable period and the employees who became participants during the applicable period. All participating employees are taken into account in calculating the turnover rate, including vested as well as nonvested participating employees.

Applicable period. Generally, the applicable period is a Plan Year (or, in the case of a plan year that is less than 12 months, the plan year plus the immediately preceding plan year). However, if there are a series of related severances from employment, the applicable period will be extended.

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Employer-initiated severance. Generally, this is defined as any severance from employment other than a severance caused by death, Disability, or retirement on or after normal retirement age. An employee's severance is considered employer-initiated even if caused by an event outside of the employer's control, such as severance due to depressed economic conditions. In certain situations, the employer may be able to prove that an employee's severance was not employer-initiated. For example, the employer may produce information from personnel files, employee statements, and other corporate records to support a defense that severance was in fact voluntary. Notice that the presumption is against the employer, unless they can prove otherwise. Many employers, in industries with transient workers, would contend that the majority of employees quit for reasons wholly independent of the employer's actions.

Routine turnover. If the employer can produce data demonstrating that the turnover rate for an applicable period is routine for the employer, this will support a finding that no partial termination has occurred. For example, information on the turnover rate in other periods and the extent to which terminated employees were actually replaced, whether the new employees performed the same functions, had the same job classification or title, and received comparable Compensation are relevant to determining whether the turnover is routine for the employer.

Example
Employer X maintains Profit Sharing Plan A. The plan year for Plan A is the calendar year. The plan participants include both current and former employees. Vesting is 3-year cliff 100% vesting. The plan also provides for full vesting upon plan termination or upon a partial termination of the plan that affects the participant. Employer X ceases operations at one of its four business locations. As a result, 23% of the Plan A participants who are employees of Employer X cease active participation in Plan A due to a severance from employment (excluding any severance from employment that is either on account of death or disability, or retirement on or after normal retirement age) during the plan year. Some of these participants are fully vested due to having completed 3 years of service or having attained Normal Retirement Age. Plan A is not terminated. A partial termination has likely occurred because the turnover rate is 20% or more. The facts and circumstances support the finding of a partial termination because the severances from employment occurred as a result of the shutdown of one of the employer's business locations (and not as a result of routine turnover).

Other reasons potentially causing a partial termination. A partial termination may also occur for reasons other than employee turnover. For example, a partial termination may occur because of plan amendments that adversely affect the rights of employees to vest in benefits under the plan, plan amendments that exclude a group of employees who previously had been covered by the plan, or the reduction or cessation of future benefit accruals resulting in a potential reversion to the employer.

Industry Concerns. There is a practitioner concern about small employers being caught up in the 20% presumption. If an employer's firm consists of five or fewer employees and one quits for any reason, that would result in turnover rate of 20% or greater. This should not automatically result in a partial termination or even the consideration of whether one occurred. It is hoped that the IRS will provide some clarification for small employers.

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