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In the past year, the economic downturn has forced many companies to take cost cutting measures to sustain profitability or in many cases to survive.  Many companies have reduced their workforce as result.  If a reduction in force results in a substantial decrease of the company's workforce a "partial plan termination" for purposes of employee benefit plans such as 401(K) plans and profit sharing plans may have occurred.

A partial plan termination does not mean that the plan is forced to liquidate.  The rule simply requires that in certain circumstances when a partial plan termination is deemed to have occurred, affected participants may become 100% vested in their 401(k) or profit sharing accounts.  Many plans allow employers to reduce matching or profit sharing contributions by the amount of forfeited contributions accumulated in the plan.  An employer that terminated a significant portion of its workforce during the past year may have been anticipating a reduction in its matching contribution burden due to accumulated forfeitures.  However, if terminated employees became vested, forfeitures may no longer be available.

Generally, all of the facts and circumstances must be considered in making a determination as to whether or not a partial plan termination has occurred.  However, if a change in the number of employees covered by the plan is "substantial" and the change can be connected to "one particular economic event", ie: change in plan provisions, layoffs, plant closing, etc. then this may result in a partial plan termination. 

The key considerations in a partial plan termination relate to the definition of substantial and the definition of "one particular economic event".  Court rulings have indicated that there is a rebuttable presumption that a more than 20% reduction in participants can be construed as a partial plan termination.  In addition a more than 40% reduction results in a conclusive presumption that a partial plan termination has occurred.  At the other end of the spectrum, in the case of a less than 10% reduction, no partial plan termination has occurred.  There have been a considerable number of court cases over the years surrounding the definition of "one particular economic event", and consultation with legal counsel may be a prudent course of action should questions arise.

If your Company has reduced its workforce substantially in the past year, or even two years, it may be time to consult legal counsel or your third party administrator.  Also it is important to note that consideration and analysis of whether a partial plan termination has occurred may be an additional service, at an additional fee, that you have to specifically request from your third party administrator.

Patrick Curtis, CPA is a Senior Manager with Rubino & McGeehin and can be reached at pcurtis@rubino.com for more information related to this topic.