Partial Termination of Retirement Plans

Many employers are aware that when they fully terminate a retirement plan, all participants become 100% vested in their account balances. However, the “partial termination” provision is less well-known but may be of greater relevance to many companies in today’s troubled economy.

A partial termination of a retirement plan, including a 401(k) plan, occurs when there has been involuntary termination of a significant number of participants in the plan. Generally, a termination of 20% of the participants during the plan year is deemed sufficient to trigger the partial termination rules. When a partial termination occurs, the participants who have been terminated become 100% vested in their plan account. In some situations this may mean a second calculation of the proper benefit payment followed by an additional distribution to a former employee.

Companies who think that they may have had sufficient number of lay-offs or terminations to trigger these partial termination rules should consult with their attorney to determine the proper next steps. Larkin Hoffman’s Employee Benefit attorneys can assist your company in navigating the partial termination rules.