A Facts and Circumstances Analysis
Once the turnover rate has been determined, all other facts and circumstances must be reviewed. Facts and circumstances indicating that the turnover rate for an applicable period is routine for the employer would support a finding that there is no partial termination for that applicable period. For this purpose, information as to the turnover rate in other periods and the extent to which terminated employees were actually replaced, whether the new employees performed the same functions, had the same job classification or title, and received comparable compensation are relevant to determining whether the turnover is routine for the employer.
As noted, IRS requirements provide that upon a partial termination, the accounts of all “affected employees” must be fully vested. The IRS guidance does not specify who is included in the term “affected employees,” or how that group should be determined. At minimum, this is viewed as all employees with an employer-initiated termination during the applicable period. Conservatively, some employers will include employees that had a voluntary termination during the applicable period.
For employers considering a reduction in force, conducting a partial termination analysis can avoid cumbersome and possibly costly remediation (e.g. finding former participants and making additional distributions from the plan) if a partial termination is later found to have occurred. As such, we recommend monitoring the turnover rate and including benefits counsel during the planning process.
For assistance with a partial termination analysis, contact your Baker McKenzie employment & compensation attorney.