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Company Layoffs May Lead to EBP “Partial Plan Terminations”

Retirement plans

Business owners need to be aware that significant employee layoffs may lead to unintended partial plan terminations. In our region, oil and gas companies could be particularly affected as a result of the industry’s current downturn. We are indeed seeing large numbers of layoffs among our energy client base.

The critical number to watch for is 20 percent. A partial plan termination could be triggered when more than 20 percent of your total employee benefit plan participants are laid off in a particular year. The resulting impact on your company is that these affected employees must become fully vested in their account balance at the time the partial termination occurred.

A concerning aspect of the partial plan termination is that, in discussions with clients experiencing large layoffs, our clients had expected they would be notified by their third-party administrators (TPAs) when they reached critical mass. In fact, the responsibility rests with the employer. Additionally, many clients were not even aware of the partial plan termination law.

Becoming Aware: Making the Calculation

You can begin now to gather data on your retirement plan base. To calculate the relevant 20 percent, you will need to understand how you measure your total plan participants. Referred to as “active participants,” these may include employees who are eligible to but do not necessarily make salary deferral contributions to the retirement plan.

According to the IRS, an “affected employee” is generally anyone who left employment for any reason during the plan year in which the partial plan termination occurred and who still has an account balance under the plan. Whether they were vested or not at the time of the termination is not relevant.

Becoming Aware: Consequences

Once you become aware that a partial plan termination has occurred, you will need to determine which participants require accelerated vesting as a result. The longer you are unaware that the termination has been triggered, the greater the potential impact on your company becomes. This is because any affected employee who takes a distribution after the trigger date may incorrectly incur forfeitures and is hence owed more benefits. In the event those forfeitures were distributed to other participants and cannot be recovered, your company will need to repay the forfeitures on the distribution.

What You Can Do Now

We strongly advise any company experiencing major layoffs to work with an ERISA attorney to help you calculate when you might be approaching the critical 20 percent or if the partial plan termination has already initiated. Again, the longer you put off determining your benefit plan status, the greater the impact on your company.

LaPorte has an experienced staff of employee benefit plan professionals who are available to discuss concerns you may have about partial plan terminations or other EBP issues. Contact LaPorte’s EBP Services Group Leader Director Jordan Montz, CPA, CCIFP, for more information.