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Retirement Plan FAQs regarding Partial Plan Termination

We had to let go 4 of our 10 employees this year. My accountant told me this may constitute a “partial termination.” What does this mean?

If more than 20% of your total plan participants were laid off in a particular year, then your plan may have a partial termination. The law requires all “affected participants” to be fully vested in their account balance as of the date of a full or partial plan termination. This means that affected plan participants must become 100% vested in all employer contributions (including matching contributions) regardless of the plan’s vesting schedule.

An “affected participant” 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 a participant has 5 consecutive 1-year breaks in service before the participant forfeits their nonvested account balance. For these plans, participants who left during the plan year of the partial termination and who have not had 5 consecutive 1-year breaks in service are affected participants. (See Code Section 411(d)(3) and Revenue Ruling 2007-43.)

Page Last Reviewed or Updated: 30-Oct-2013