A partial plan termination is presumed by the IRS to occur when 20 percent or more of a company’s employees are no longer eligible to participate in the plan in a determined span of time (typically one plan year, but it can be other spans of time based on facts and circumstances). Routine turnover during the year is generally not considered a partial plan termination.
To determine whether your turnover rate is routine, consider the following factors:
- What was your turnover rate during other periods and what was the extent to which terminated employees were actually replaced?
- Do the new employees perform the same functions as the previous employees? Do they have the same job classification or title? Do they have comparable compensation?
There is no requirement to notify the IRS of a partial plan termination, but all affected employees must be 100 percent vested in their account balance as of the date of their termination. If this hasn’t happened, a Voluntary Correction Program would be appropriate.
This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.
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