When manufacturers and other employers undergo a reduction in force, or closure or sale of a division, they may inadvertently overlook the effect of the transaction on their 401(k) plan.

One issue in particular to pay attention to in advance of the RIF or the division event is whether it will trigger a partial plan termination under Section 411(d)(3) of the Internal Revenue Code.

Section 411(d)(3) requires that all affected employees who had a severance from employment during the applicable period relating to the partial plan termination must be 100% vested in their accounts, even if they are not yet fully vested in the plan.

Because of this special vesting for partial plan terminations, errors can occur if affected participants receive distributions from the plan based on vesting percentages below 100%.

This article explains the applicable IRS test for determining whether a partial plan termination has occurred and what an employer should do if it has missed the occurrence of a partial plan termination and failed to treat its affected participants as immediately vested.

Did a Partial Plan Termination Occur?

The applicable IRS regulations establish a facts and circumstances test for determining when a partial plan termination has occurred.

Among the relevant factors is whether the employer has terminated a group of employees (whether vested or unvested in the plan) in connection with a company-initiated event such as a RIF, or the closing of a division or a company...

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