If a defined contribution plan sponsor shuts down a location and jettisons 23% of its employees, that move constitutes a partial termination of the plan.
Ingrid Grinde, an IRS official, has given that interpretation in IRS Revenue Ruling 2007-43, which concerns the minimum vesting standards described in Section 411 of the Internal Revenue Code.
A taxpayer wrote to the IRS about the effects of a shutdown of one of an employer’s four locations on the employer’s retirement plan.
When a plan undergoes a partial termination, “the rights of all affected employees to benefits accrued to the date of such partial termination, to the extent funded on that date, or the amounts credited to their accounts, are nonforfeitable,” Grinde writes in the revenue ruling.
In light of past revenue rulings issued in 1973 and 1981 and a 2004 opinion issued by the 7th U.S. Circuit Court of Appeals, if the turnover rate for a plan sponsor’s employees is at least 20%, “there is a presumption that a partial termination of the plan has occurred,” Grinde writes.
Both vested and nonvested participating employees should be included in computations of the turnover rate, Grinde writes.
A partial termination also might occur if the plan sponsor changes the plan rules in ways that could hurt the interests of the plan participants, Grinde writes.
A copy of the revenue ruling is on the Web