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Retirement Plan FAQs regarding Partial Plan Termination

An employer can terminate a plan for various reasons including bankruptcy, merger or simply voluntarily terminating it. 

These FAQs provide general information and shouldn’t be cited as legal authority.


We had to let go 4 of our 10 employees this year. Is this a “partial termination”?

Your plan may have a partial termination if more than 20% of your total plan participants were 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.

The law requires all “affected employees” to 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. Employee salary deferrals are always 100% vested.

An affected employee in a partial termination is generally anyone who left employment for any reason during the plan year in which the partial termination occurred and who still has an account balance under the plan. Some plans wait until an employee has 5 consecutive 1-year breaks in service before he forfeits their nonvested account balance. For these plans, employees who left during the plan year of the partial termination and who have not had 5 consecutive 1-year breaks in service are affected employees. See IRC Section 411(d)(3) and Revenue Ruling 2007-43.


Can certain plan amendments trigger a partial termination?

A partial termination may occur due to a plan amendment that excludes employees or adversely affects vesting.

Example: A plan amendment that excludes certain categories of employees from further participating in the employer’s plan, resulting in the exclusion of 120 out of 170 participants, is deemed a partial termination (Revenue Ruling 72-439, 1972-2 C.B. 22).


We typically experience employee turnover in excess of 20 percent per year. Is this a partial termination?

Probably not. Routine turnover during the year is generally not considered a partial termination.

Factors relevant to determining whether the turnover rate is routine include:

  • 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,
  • whether the new employees had the same job classification or title, and
  • whether the new employees received comparable compensation.

Do employees who voluntarily quit count for purposes of determining a partial termination?

Generally, voluntary terminations do not count in determining whether a partial termination has occurred as they do for determining who must vest after partial termination. However, in some cases employees who appear to terminate employment voluntarily have been found to have terminated involuntarily under a constructive discharge theory. The employer's intent, working conditions and the reasonably foreseeable impact of the employer's conduct on the employees are factors in evaluating a constructive discharge.


What are the consequences of a partial termination?

An employer who partially terminates a plan must determine which participants require an acceleration of vesting due to the partial termination. Participants who improperly incurred forfeitures are owed more benefits. To the extent those forfeitures have been distributed to other participants and cannot be recovered, the employer will be responsible for making the affected participants whole. This vesting failure can be corrected using the Voluntary Correction Program.

Page Last Reviewed or Updated: 18-Jul-2014