401(k) plan sponsors and administrators are under enormous pressure to remain in compliance with a variety of regulations. Partial plan terminations are one compliance area that can create complexity, particularly with employee vesting.

As the one with a fiduciary duty toward the plan, a vesting failure would make the employer responsible for restoring misappropriated funds. Following 401(k) plan termination requirements helps ensure a speedier, less complicated audit.

What is a Partial Plan Termination?

A partial plan termination is defined by the Internal Revenue Service (IRS) as a situation where more than 20% of the total plan participants are involuntarily terminated in a particular year. The 20% figure stands whether the terminations all took place at once, such as a plant closing, or if they took place over the year due to an economic downturn or other causes.

Routine turnover isn’t considered to be partial plan terminations, especially in industries with typically high turnover. Voluntary exits from the business also don’t count toward the 20% calculation.

PARTIAL PLAN TERMINATION Impact on EMPLOYEE VESTING

In the case of a partial plan termination, all employees that terminated service during the year for any reason and had an account balance with the plan become fully vested in all employer contributions regardless of the plans’ vesting schedule.

For additional details refer to IRC Section 411(d) (3) and Revenue Ruling 2007-43. It is important to review this ruling if your company experiences turnover to ensure participant accounts are handled appropriately.

You should work with your service provider if you believe your 401(k) plan may be impacted by a partial plan termination.

Why Choose Anders as Your 401(k) Plan Auditor

As the plan sponsor, when it’s time to audit your 401(k) plan, it’s vital that you hire an experienced auditor to ensure your plan is in compliance. At Anders we specialize in retirement plan audits. We have the ability to offer assistance entirely off-site with little or no distraction to your daily office routine.

We also offer flat-fee pricing so there are no surprises on your bill when the job is complete. To get started, request a free 401(k) audit consultation below or contact the team at (314)-886-7913 to schedule an appointment.