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Employee Plans Compliance Unit (EPCU) - Completed Projects with Summary Reports - Partial Termination/Partial Vesting


The EPCU contacted Form 5500 return filers that reported a decrease in plan participants and had participants that were not 100% vested and were terminated from employment. The contact made was to determine if the plan experienced a partial termination. If a partial termination did occur, the goal of this project was to determine whether plan administrators were complying with the vesting requirements of IRC Section 411(d)(3).

The letter sent to plan sponsors asked:

  • Whether the plan document contained the plan language required under IRC section 411(d)(3) (vesting rules for terminations, partial terminations and complete discontinuance of contributions)
  • Whether the company downsized during the plan year. If the company did not downsize, an explanation was requested for the decrease in plan participants.
  • Whether all participants were fully vested if a partial termination occurred. If all participants were not fully vested in the case of a partial termination, an explanation was requested with instructions to include the number of participants who were not fully vested and the total amount of the forfeitures.


Over a span of 3 years, nearly 2,000 letters were sent. Approximately half of the contacts were due to errors on the Form 5500 return. In many of these cases, the plan sponsors amended their returns and corrected the errors. Taxpayers made errors in participant counts.

Also, a significant number of plans had fully vested all their participants as a result of a partial termination but it was indicated on their Form 5500 that there were participants who were not fully vested.

The plan administrators misinterpreted the Form 5500. They counted eligible participants who chose not to participate in their 401(k) plan as not being fully vested. Some plans did not experience a partial termination because account balances were transferred to another plan but failed to indicate on Form 5500 Schedule H that the assets were in fact transferred to another plan.

Approximately 30% of the cases were closed as “no change” cases. In most of these cases, the EPCU concluded that the plan did not experience a partial termination. The Form 5500 was used as a screening process to identify plans that had a decrease of total participants of 20% or more. At the time, the Form 5500 did not provide us with the number of active employees at the beginning of the plan year so it was not possible to determine prior to the compliance check the turnover rate for active participants. In some of the “no change” cases, the percent decrease of active participants was more than 20% but the EPCU still concluded that no partial termination occurred. In these cases, the plan sponsor hired seasonable employees, short term contract employees or part time employees that did not work enough hours to be eligible to participate in the plan. Or, in some cases, the plan sponsor was in an industry in which frequent turnover was the norm and participants in these plans often left the company before they became eligible to receive a benefit under the plan. To give us a better idea of typical turnover rates, we looked at decreases in plan participants as stated on Forms 5500 over a three year period. We also looked at numbers to determine whether those employees who left were replaced.

In almost 10% of the cases, it was determined during the compliance check that a partial termination had occurred and affected participants had not been fully vested. In most of these cases forfeitures were reinstated. In a few of these cases, it was not necessary to reinstate the forfeitures for some or all of the affected employees because no distributions had as yet been made. In these cases the vesting percentages were corrected. The amount of forfeitures plus interest that was reinstated for cases with forfeitures totaled $2,208,678.

The primary reason for the failure to vest all affected participants is that several practitioners did not realize that when a partial termination occurs, both the employees who voluntarily and involuntarily terminated during the applicable period need to be 100% vested as specified in Revenue Ruling 2007-43. In the correction cases, it was primarily the employees who terminated voluntarily that needed to have their forfeitures reinstated.


As a result of this project, hundreds of plan participants benefited by having their forfeitures plus lost earnings reinstated.

Another benefit of this project was that practitioners became aware of the IRS position outlined in Revenue Ruling 2007-43 as to what constitutes a partial termination and who needs to be vested when a partial termination occurs.

This project taught us that there were significant numbers of Form 5500 return preparers making errors on the reporting of participant counts.

The EPCU suggested to a Forms Team to address active participants at the beginning of the plan year (when at the time, only the count for active participants at the end of the plan year was included on the Form 5500 series return). This enhancement was incorporated into the Form 5500 and Form 5500-SF beginning with the 2014 form.

Also, during this project, the EPCU requested a change to the Form 5500-SF to include the question on the Form 5500 regarding the number of participants that terminated employment during the plan year with accrued benefits that were less than 100% vested. This question was added to the Form 5500-SF beginning with the 2014 form.


When a group of participants is involuntarily terminated from the plan due to employer initiated severance or a plan amendment, a partial termination occurs if the reduction of plan participants is deemed “significant”. A percentage test is used in determining what is significant. Generally, there is a presumption that a partial termination occurs when more than 20% of the plan’s participants are involuntarily terminated from the plan during the “applicable period” which is generally the plan year. When a partial termination occurs, section 411(d)(3) of the Code requires full and immediate vesting of all “affected” participants, including those participants who voluntarily terminated from the plan during the applicable period. (See Revenue Ruling 2007-43).