Why did I receive an EPCU Compliance Check Letter?
You filed a Form 5500 series return indicating that the plan had a significant decrease in plan participants. Employers who have a decrease of 20% or more in participation may have experienced a partial termination.
What is the EPCU attempting to determine?
We want to determine if the plan did experience a partial termination and did the plan administrators comply with the vesting requirements of Internal Revenue Code (IRC) section 411(d)(3). Additionally, we want to determine the accuracy of the information provided on Form 5500.
The EPCU will send contact letters, seeking data regarding the percentage of involuntary terminations from the plan and the circumstances which led to company downsizing and the reduction of plan participants to a selected group of Form 5500 filers. We will request an explanation or discussion of any special circumstances that may have an impact on whether a partial termination has occurred. The EPCU will evaluate the response and work with the plan sponsor to take appropriate action.
What actions do I need to take?
Please complete the Request for Information. You may also furnish any other documents or clarifying material that you believe will be helpful for us to review. You should make every effort to be as complete and accurate as possible in your responses and respond by the due date. If you need additional time, make sure to contact the person whose name is listed on the letter to request an extension. Failure to provide the information could result in examination of your plan.
If You Have Questions
Please feel free to contact the person listed in the cover letter with questions about this project and how it relates to your situation.
The Partial Termination project focuses on information from employers’ Form 5500 (Annual Return/Report of Employee Benefit Plan) filings which indicate that their plans have had a significant decrease in plan participants. The project will determine if the plans have experienced a partial termination and whether the plan sponsors are following the requirements of the plan document, and related law pertaining to partial terminations and if the information reported on the Form 5500 is accurate.
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).
The EPCU previously worked a partial termination project. This revised project will have a new sample to determine if the compliance measure has changed or remained the same. The new sample should have better data due to an adopted forms change recommendation on the Form 5500 series return, to include the number of active participants at the beginning of the year. The EPCU will be mailing the contact letter and Attachment to a random sample of plan sponsors. A closing letter will be issued to the plan sponsor upon completion of our review.