Potential Impact of COVID-19 on Retirement Plans: Partial Plan Terminations
7/29/2020
Copyright Boutwell Fay LLP 20201
BOUTWELL FAY LLPERISA and Employee Benefits Attorneys
1401 Dove Street, Suite 540
Newport Beach, CA 92660
www.boutwellfay.com
PotentialImpactofCOVID‐19onRetirementPlans:PartialPlan
Terminations
RuelB.PileSherrieM.Boutwell
July29,2020
RuelB.PileSherrieM.Boutwell
July29,2020
BOUTWELL FAY LLP
Sherrie BoutwellSherrie BoutwellSherrie Boutwell has
focused thirty years in the areas of employee benefits law and ERISA, with an emphasis on retirement and deferred compensation plans. Sherrie takes pride in bringing a practical and down to earth approach to resolving complex benefits issues involving qualified retirement plans, non-qualified plans and health and welfare plans.
Sherrie Boutwell has focused thirty years in the areas of employee benefits law and ERISA, with an emphasis on retirement and deferred compensation plans. Sherrie takes pride in bringing a practical and down to earth approach to resolving complex benefits issues involving qualified retirement plans, non-qualified plans and health and welfare plans.
Ruel PileRuel PileRuel Pile has more than 26 years
of of legal experience in employee benefits and ERISA. He has worked as in-house ERISA counsel for Fortune 500 companies, and for the U.S. Department of Labor, within the national office of EBSA –Office of Regulations and Interpretations. He concentrates his practice primarily in employee benefits, executive compensation, federal tax, corporate governance, and ERISA.
Ruel Pile has more than 26 years of of legal experience in employee benefits and ERISA. He has worked as in-house ERISA counsel for Fortune 500 companies, and for the U.S. Department of Labor, within the national office of EBSA –Office of Regulations and Interpretations. He concentrates his practice primarily in employee benefits, executive compensation, federal tax, corporate governance, and ERISA.
Boutwell Fay’s Presenters
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Potential Impact of COVID-19 on Retirement Plans: Partial Plan Terminations
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DISCLAIMERDISCLAIMER
Thispresentationisnotlegaladviceanddoesnotcreateanattorneyclientrelationshiporprivilege.TheviewsarethoseoftheauthorandnotoftheFirmortheSponsorofthePresentation.Thisinformationiscurrentasofthedatepresented.
Copyright,BoutwellFayLLP2020,allrightsreserved.
Thispresentationisnotlegaladviceanddoesnotcreateanattorneyclientrelationshiporprivilege.TheviewsarethoseoftheauthorandnotoftheFirmortheSponsorofthePresentation.Thisinformationiscurrentasofthedatepresented.
Copyright,BoutwellFayLLP2020,allrightsreserved.
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WeWillDiscussWeWillDiscuss
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• TheRelevantRulesandGuidanceonPartialTerminations
• FactsandCircumstancesTest• MostRelevantIRSGuidanceandCases• SignificanceofMarch2019– TreasuryandIRSJointPolicyStatement
• RebuttingtheIRSPresumption• PotentialCostsRelatedtoReachingtheWrongConclusion
• ReportingandDisclosure• CaseStudies
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Potential Impact of COVID-19 on Retirement Plans: Partial Plan Terminations
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TheRelevantRulesTheRelevantRulesIRCSectionandTreas.Regulation IRCsection411(d)(3)Onterminationorpartialtermination,therightsofall“affectedemployees”tobenefitsaccruedtothedateofsuchpartialtermination,totheextentfundedonthatdate,ortheamountscreditedtotheiraccounts,mustbecomevested.
Treas.Reg.section1.411(d)‐2DeterminedbytheCommissionerwithregardtoallthefactsandcircumstancesinaparticularcase.
IRCSectionandTreas.Regulation IRCsection411(d)(3)Onterminationorpartialtermination,therightsofall“affectedemployees”tobenefitsaccruedtothedateofsuchpartialtermination,totheextentfundedonthatdate,ortheamountscreditedtotheiraccounts,mustbecomevested.
Treas.Reg.section1.411(d)‐2DeterminedbytheCommissionerwithregardtoallthefactsandcircumstancesinaparticularcase.
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FactsandCircumstancesTestFactsandCircumstancesTestWhatfactorsmaybeconsideredorargued?• Reasonsunderlyingterminations(employer‐initiatedorduetootherreasons)
• Formal termination of employment relationship (lay‐off vs. furlough)
• Changestohoursorcompensationatthetimeoftermination
• Forfeitureofunvestedamounts• Externaleconomicfactorsimpactingbusiness• Employercontrol/intentoverthereductioninforce
Whatfactorsmaybeconsideredorargued?• Reasonsunderlyingterminations(employer‐initiatedorduetootherreasons)
• Formal termination of employment relationship (lay‐off vs. furlough)
• Changestohoursorcompensationatthetimeoftermination
• Forfeitureofunvestedamounts• Externaleconomicfactorsimpactingbusiness• Employercontrol/intentoverthereductioninforce
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RevenueRulingsandGCMRevenueRulingsandGCM
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• Rev.Rul.2007‐43IRSpositionisthata20%orgreaterturnoverrateintheapplicableperiodcreatesarebuttablepresumptionthatapartialterminationoccurred.
• GCM39310(1984)Whereaqualifiedplanprovidesthatparticipantswhoseparatefromservicewillbepaidtheirvestedaccruedbenefits,aparticipantwhoseparatesfromserviceandispaidvestedaccruedbenefitneednotbecomefurthervestediftheplanterminatesbeforetheparticipantincursabreakinservice.
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TurnoverRateTurnoverRateRev.Rul.2007‐43“Tocalculatetheturnoverrate,takeallparticipatingemployees,bothvestedandnonvested,intoaccount.Theturnoverrate(TR)isdeterminedbydividingthenumberofparticipatingemployeeswhohadanemployer‐initiatedseverancefromemploymentduringtheapplicableperiod(A)bythesumofalloftheparticipatingemployeesatthestartoftheapplicableperiod(X)andtheemployeeswhobecameparticipantsduringtheapplicableperiod(Y).”
R= ÷ ( + )
Rev.Rul.2007‐43“Tocalculatetheturnoverrate,takeallparticipatingemployees,bothvestedandnonvested,intoaccount.Theturnoverrate(TR)isdeterminedbydividingthenumberofparticipatingemployeeswhohadanemployer‐initiatedseverancefromemploymentduringtheapplicableperiod(A)bythesumofalloftheparticipatingemployeesatthestartoftheapplicableperiod(X)andtheemployeeswhobecameparticipantsduringtheapplicableperiod(Y).”
R= ÷ ( + )
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ApplicablePeriodApplicablePeriodRev.Rul.2007‐43
“Theapplicableperioddependsonthecircumstances:theapplicableperiodisaplanyear(or,inthecaseofaplanyearthatislessthan12months,theplanyearplustheimmediatelyprecedingplanyear)oralongerperiodifthereareaseriesofrelatedseverancesfromemployment.”(emphasisadded)
Rev.Rul.2007‐43
“Theapplicableperioddependsonthecircumstances:theapplicableperiodisaplanyear(or,inthecaseofaplanyearthatislessthan12months,theplanyearplustheimmediatelyprecedingplanyear)oralongerperiodifthereareaseriesofrelatedseverancesfromemployment.”(emphasisadded)
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Vesting“Affected”ParticipantsVesting“Affected”ParticipantsRev.Rul.2007‐43"Ifapartialterminationoccursonaccountofturnoverduringanapplicableperiod,allparticipatingemployeeswhohadaseverancefromemploymentduringtheperiodmustbefullyvestedintheiraccruedbenefits,totheextentfundedonthatdate,orintheamountscreditedtotheiraccounts.”(emphasisadded)
Rev.Rul.2007‐43"Ifapartialterminationoccursonaccountofturnoverduringanapplicableperiod,allparticipatingemployeeswhohadaseverancefromemploymentduringtheperiodmustbefullyvestedintheiraccruedbenefits,totheextentfundedonthatdate,orintheamountscreditedtotheiraccounts.”(emphasisadded)
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SignificantCourtCasesSignificantCourtCasesMatzv.HouseholdInternationalTaxReductionInvestmentPlan,388F.3d570(7thCir.2004)
Thereisarebuttablepresumptionthata20%orgreaterreductioninplanparticipantsisapartialterminationforpurposesof§ 411(d)(3).ThisstandardisincorporatedintoRev.Rul.2007‐43.
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SignificantCourtCasesSignificantCourtCasesWeilv.TersonCo.RetirementPlanAdministrativeCommittee,933F.2nd106(2dCir.1991)
Theturnoverrateinbothvestedandnonvestedparticipantsistakenintoaccountindeterminingwhethertherehasbeenareductionintheworkforcethatconstitutesapartialterminationforpurposesof§ 411(d)(3).ThisstandardisincorporatedintoRev.Rul.2007‐43.
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SignificantCourtCasesSignificantCourtCases
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Bordav.Hardy,138F.3d1062(1998)Addressescircumstancesofwhenaparticipantis"affected"byaplan'stermination?“Apersonisunaffectedbyaplan'sterminationunlesseitherheorshewasemployedbytheplan‐sponsoringemployeratthetimeoftheplan'sterminationorhisorherdischargewasdirectlylinkedtotheplan'stermination.”AppearscontrarytotheIRSpositioninRev.Rul.2007‐43.Ithasnotbeentestedincourt.
Canyoureallyexpecttobecomevestedinunvestedbenefitsifyouvoluntarilyterminate?
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SignificantCourtCasesSignificantCourtCasesSeaRayEmployees'StockOwnership&ProfitSharingPlanv.Robinson,164F.3d981,986(6thCir.1999),cert.denied,528U.S.1114,120S.Ct.931,145L.Ed.2d810(2000)
A plan administratorhasthediscretiontointerpretandconstruetheplan’stermstodecidewhetherornotapartialterminationhasoccurred.
SeaRayEmployees'StockOwnership&ProfitSharingPlanv.Robinson,164F.3d981,986(6thCir.1999),cert.denied,528U.S.1114,120S.Ct.931,145L.Ed.2d810(2000)
A plan administratorhasthediscretiontointerpretandconstruetheplan’stermstodecidewhetherornotapartialterminationhasoccurred.
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Potential Impact of COVID-19 on Retirement Plans: Partial Plan Terminations
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IRSPositiononSub‐regulatoryGuidance
IRSPositiononSub‐regulatoryGuidance
TreasuryandIRSJointPolicyStatementonDeferenceandtheTaxRegulatoryProcess(March2019)
TheIRSwillnot"seekjudicialdeferenceunder Auer [citationomitted]or Chevron [citationomitted]tointerpretationssetforthonlyinsub‐regulatoryguidance.”Inotherwords,whilethecourtshavegivenregulatoryagenciesbroadauthoritytointerprettheirregulations,andsub‐regulatoryguidance(e.g.,revenuerulings,revenueprocedures,notices,andannouncements),theIRSwillnotseekthisjudicialdeferenceonitssub‐regulatoryguidance.
TreasuryandIRSJointPolicyStatementonDeferenceandtheTaxRegulatoryProcess(March2019)
TheIRSwillnot"seekjudicialdeferenceunder Auer [citationomitted]or Chevron [citationomitted]tointerpretationssetforthonlyinsub‐regulatoryguidance.”Inotherwords,whilethecourtshavegivenregulatoryagenciesbroadauthoritytointerprettheirregulations,andsub‐regulatoryguidance(e.g.,revenuerulings,revenueprocedures,notices,andannouncements),theIRSwillnotseekthisjudicialdeferenceonitssub‐regulatoryguidance.
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Whyisthisimportant?Whyisthisimportant?
Rev.Rul.2007‐43issub‐regulatoryguidance
IfataxpayerchallengestheIRSonanypositionprovidedinRev.Rul.2007‐43,theIRSwillnotaskthecourtforjudicialdeference—thiscouldhelpleveltheplayingfieldforthetaxpayertochallengethepositionsoftheIRSinRev.Rul.2007‐43.
Rev.Rul.2007‐43issub‐regulatoryguidance
IfataxpayerchallengestheIRSonanypositionprovidedinRev.Rul.2007‐43,theIRSwillnotaskthecourtforjudicialdeference—thiscouldhelpleveltheplayingfieldforthetaxpayertochallengethepositionsoftheIRSinRev.Rul.2007‐43.
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Potential Impact of COVID-19 on Retirement Plans: Partial Plan Terminations
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RebuttingthePresumptionRebuttingthePresumption
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• Anextraordinarypandemicthathasresultedinmandatory,governmentshut‐downsofbusinesses
• Circumstancesbeyondanyemployer’scontrol• Lay‐offsvs.furloughs– intentofsomeemployersistohavetheseemployeesreturntowork
• Documentingemployer‐initiatedterminationsvs.voluntaryterminations
• UnprecedentedCOVID‐19pandemicsituationmayresultinnewlaworadditionalIRSguidance
• Anextraordinarypandemicthathasresultedinmandatory,governmentshut‐downsofbusinesses
• Circumstancesbeyondanyemployer’scontrol• Lay‐offsvs.furloughs– intentofsomeemployersistohavetheseemployeesreturntowork
• Documentingemployer‐initiatedterminationsvs.voluntaryterminations
• UnprecedentedCOVID‐19pandemicsituationmayresultinnewlaworadditionalIRSguidance
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PotentialCostsforReachingtheWrongConclusion
PotentialCostsforReachingtheWrongConclusion
• PlandisqualificationunderIRCsection411(d)(3)‐canbevoluntarilycorrectedunderEPCRS(seeattachedFAQ:WhatisEPCRS?)• Self‐correction• VCP• AuditCAP
• Litigation/classactionlitigation• Lossofuseofforfeiturestowardsplanexpenses–thesemayneedtoberestoredtotheplan
• DOLenforcement
• PlandisqualificationunderIRCsection411(d)(3)‐canbevoluntarilycorrectedunderEPCRS(seeattachedFAQ:WhatisEPCRS?)• Self‐correction• VCP• AuditCAP
• Litigation/classactionlitigation• Lossofuseofforfeiturestowardsplanexpenses–thesemayneedtoberestoredtotheplan
• DOLenforcement
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Potential Impact of COVID-19 on Retirement Plans: Partial Plan Terminations
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ReportingandDisclosureReportingandDisclosure
• Form5500– PartII,Questions5and6,revealstothepublicapotentialpartialtermination/mayimpactCPAaudit
• Form5300– MayusetorequestadeterminationfromtheIRSwhetherapartialterminationhasoccurred
• Form5310– DatarelatingtopartialterminationsisrequestedonForm5310
• Form5500– PartII,Questions5and6,revealstothepublicapotentialpartialtermination/mayimpactCPAaudit
• Form5300– MayusetorequestadeterminationfromtheIRSwhetherapartialterminationhasoccurred
• Form5310– DatarelatingtopartialterminationsisrequestedonForm5310
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CaseStudiesCaseStudies
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1.ApplicablePeriodSpanningMultipleYears
Anemployerhas100employeespre‐COVID,thenisforcedtofurlough70workersbutbringsback60ofthembeforetheendoftheplanyear,thensubsequentlylaysoff10inJanuary2021giventhecontinuedCOVIDrelatedeconomicdownturn.
1.ApplicablePeriodSpanningMultipleYears
Anemployerhas100employeespre‐COVID,thenisforcedtofurlough70workersbutbringsback60ofthembeforetheendoftheplanyear,thensubsequentlylaysoff10inJanuary2021giventhecontinuedCOVIDrelatedeconomicdownturn.
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CaseStudiesCaseStudies2.CircumstancesthatIndirectlyCauseEmployeestoLeaveVoluntarily
Samefactsin1above,exceptthatinsteadoffurloughing70workers,theemployerseverelyreducesthehoursof70workersduetotheCOVIDrelatedeconomicdownturn(lessthan50%ofhourspreviouslyworked),and20employeesleave“voluntarily”aftertheyfindotheremployment.
2.CircumstancesthatIndirectlyCauseEmployeestoLeaveVoluntarily
Samefactsin1above,exceptthatinsteadoffurloughing70workers,theemployerseverelyreducesthehoursof70workersduetotheCOVIDrelatedeconomicdownturn(lessthan50%ofhourspreviouslyworked),and20employeesleave“voluntarily”aftertheyfindotheremployment.
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CaseStudiesCaseStudies3. No Actual Loss of Unvested amounts
Same facts in 1 above, except the employerterminates 50 employees, but rehires them allback before they lose their right to vest in theirunvested balances.
3. No Actual Loss of Unvested amounts
Same facts in 1 above, except the employerterminates 50 employees, but rehires them allback before they lose their right to vest in theirunvested balances.
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Potential Impact of COVID-19 on Retirement Plans: Partial Plan Terminations
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CaseStudiesCaseStudies
4.UnrelatedEventsAcrossMorethanOnePlanYear
Employerlaysoff10%ofitsworkforcerelatedtoageneraleconomicdownturninyear1andanother10%relatedtobusinessdecisiontocloseasubsidiaryforregulatoryreasonsinyear2.
4.UnrelatedEventsAcrossMorethanOnePlanYear
Employerlaysoff10%ofitsworkforcerelatedtoageneraleconomicdownturninyear1andanother10%relatedtobusinessdecisiontocloseasubsidiaryforregulatoryreasonsinyear2.
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CaseStudiesCaseStudies5. UnrelatedEventsAcrossMorethanOne
PlanYear(spinoff)
Employerlaysoff10%ofitsworkforcerelatedtoaspinoffinyearoneandanother10%relatedtoageneraleconomicdownturninyear2.
5. UnrelatedEventsAcrossMorethanOnePlanYear(spinoff)
Employerlaysoff10%ofitsworkforcerelatedtoaspinoffinyearoneandanother10%relatedtoageneraleconomicdownturninyear2.
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Potential Impact of COVID-19 on Retirement Plans: Partial Plan Terminations
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Questions?Questions?
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Sherrie Boutwell, [email protected]
Sherrie Boutwell, [email protected]
Ruel Pile, [email protected]
Ruel Pile, [email protected]
(949) 660-0481
Newport Beach New Yorkwww.boutwellfay.com
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1401 Dove Street, Suite 540
Newport Beach, CA 92660
Telephone (949) 660-0481
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When Does a COVID-19 Furlough or Layoff Trigger a Partial
Termination for Your Qualified Plan? (Part I)
The short answer is – it depends. And at this point in the pandemic, it is
probably too early to conclude one way or the other. Relevant Rule and Applicable Standard
Generally, the Internal Revenue Code (Code) requires all unvested benefits to immediately vest when the (tax-qualified) plan1 is either terminated or the plan experiences a “partial termination.” Whether or not a partial termination occurs,
and the exact point in time the partial termination occurs, is determined by the IRS based on all
the facts and circumstances involved. The Code provides the following factors for employers to consider:
• Any action taken by the employer, through a plan amendment or severance of
employment, to purposefully exclude a group of previously covered participants from participating; and
• Plan amendments that adversely affect the rights of unvested benefits. Because the partial termination standard is based on facts and circumstances, along with all the other business uncertainties that come with COVID-19, employers are also faced with a
considerable amount of gray area related to partial terminations. However, there’s one threshold that has clearly been established by the IRS in Rev. Rul. 2007-43, and largely supported by the courts: if the number of participating employees in a plan is reduced by 20% or more in an “applicable period” (typically the plan year), there’s a rebuttable presumption that the plan has
been partially terminated. Unfortunately, all other aspects of partial termination fall within the gray area of “facts and circumstances.” Finding Your Way Through the Gray Area
Turnover Rates that are Below the 20% Threshold Although a rebuttable presumption of partial termination is triggered when 20% of participating
employees are terminated, the facts and circumstances may allow the IRS (or a court) to conclude that a partial termination occurred even if the percentage of terminations (i.e., turnover
1 Although 403(b) plans (tax-sheltered annuity plans) may in certain situations have unvested benefits, these types of plans are not subject to the partial termination requirements under the Code. The partial termination rules only impact tax-qualified plans that maintain a trust under Code section 401(a) – and 403(b) plans do not. In addition, for those 403(b) plans that are subject to ERISA, there is no corresponding partial termination vesting requirement for 403(b) plans. However, that does not necessarily mean that a partial termination will not result in the immediate vesting of affected participants under a 403(b) plan. The plan document or the investment arrangement used to fund the plan may contain provisions that incorporate the partial termination rules.
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rate) did not reach the 20% threshold. Although at least one court suggested that turnover rates
below 10% are presumed to not result in a partial termination, again, that is only a presumption.2 If a plan’s turnover rate approaches 10%, plan administrators may need to anticipate the possibility of a partial termination.
No Percentage Establishes a Conclusive Partial Termination While a rebuttable presumption of a partial termination is triggered after a plan’s turnover rate reaches 20%, the Code does not provide a percentage point at which a partial termination
becomes conclusive. Nevertheless, the IRS has taken the position that a partial termination occurs when a "significant percentage" of employees covered by the plan are excluded from participating in the plan either by severance of employment or plan amendment. In Rev. Rul. 2007-43, the IRS held that a mere 23% turnover rate (caused by a non-routine shutdown at one
business location) was sufficient to meet the significant percentage test and concluded that a partial termination occurred. The IRS further provided that its finding of a partial termination would apply “irrespective of whether the significant decrease in participation in the plan was the result of adverse economic conditions or causes within the control of the employer.”
Calculation of the Turnover Rate According to the IRS, the turnover rate is determined by dividing the number of participating
employees, that suffered an “employer-initiated” severance from employment during the applicable period, by the total number of participating employees, including all participating employees at the beginning of the applicable period and any additional employees that became participants in the applicable period. It is tempting to argue that only terminated non-vested employees participating in the plan should be included in the numerator, but the courts have
disagreed with this argument. Fortunately, employers are allowed to verify (supported through personnel files, employee statements, and other corporate records) that a severance from employment was purely voluntary. In addition, the IRS will take an employer’s normal, cyclical turnover rate into consideration when they make a partial termination calculation.
Applicable Period The applicable period used to calculate a plan’s turnover rate depends on the facts and
circumstances; it could span more than one plan year if employer-initiated reductions in employee participation are related. And in this case, a series of terminations related to the pandemic are likely to be grouped together when calculating a plan’s turnover rate (even if they occur in multiple plan years). Consequently, if non-COVID-19 severances occur beyond a plan
year, it is critically important for employers to record the circumstances surrounding those severances to avoid including them in the numerator in their plan’s turnover rate calculation. Unfortunately, where the employment relationship with participating employees is officially severed through layoffs, resulting in a 20% or more turnover rate, the IRS would likely conclude
that a partial termination may have occurred, even if these layoffs occur within a short period of time (e.g., 1-2 months). Next Month: more thoughts on rebutting the presumption, so stay tuned.
2 Matz v. Household Int’l Tax Reduction Inv. Plan, No. 14-2507 (7th Cir. 2014).
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Potential Risk for Getting it Wrong – Facing IRS Audit Cap or Potential Litigation
Most plans contain language regarding partial terminations. And failure to properly vest or follow the terms of the plan is a potentially disqualifying defect.3 So plans face both the risk of
disqualification and the risk of participant claims (possibly even class action claims). More on how correct/mitigate these risks next month. Immediate Action Items
Plan administrators should consider taking the following action items:
• Review plan terms and conditions related to partial terminations to understand how their
plan addresses partial terminations and vesting;
• Ensure that the plan administrator has discretionary authority in the plan to decide on whether a partial termination has occurred; and
• Meet on a regular basis with their HR team to carefully record the circumstances surrounding each employee that terminates employment so a fully-informed decision on partial termination can be made.
Conclusion
Given that the IRS (or a severed employee leaving an unvested balance in a plan) will only be
focused on a plan’s turnover rate – which will be clearly visible in the plan’s Form 5500 – employers must take the necessary steps to account for each participating employee that incurs a severance of employment. Plan administrators should consider the action items above, and meet with the plan’s auditor to understand their applicable partial termination audit standard. Finally,
employers should also be cautious with their plan’s use of its forfeiture account because they may be required to restore the forfeited portion of previously terminated participants’ accounts.
3 Code Sections 411 and 401.
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What is EPCRS?
EPCRS stands for the “Employee Plans Compliance Resolution System,” which is a comprehensive
system of correction programs for sponsors of retirement plans that are intended to satisfy but have failed
to satisfy the requirements of § 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue Code
(the "Code"). This system is described in a Revenue Procedure that is published and regularly updated by
the Internal Revenue Service. See: Revenue Procedure 2016-51. Under EPCRS, employers that sponsor
qualified retirement plans (“Plan Sponsors”) may correct these failures in order to protect the tax-favored
retirement benefits offered to their employees. Correction generally means putting participants back in
the place they would have been in had the mistake not occurred.
EPCRS is composed of three different programs: the Self- Correction Program ("SCP"), the Voluntary
Correction Program ("VCP"), and the Audit Closing Agreement Program ("Audit CAP").
SCP (self-correction). Plan Sponsors that have established compliance practices and
procedures may, at any time without paying any fee or sanction (even during an IRS
examination), correct insignificant operational mistakes. Qualified plans (such as 401(k)
plans) and 403(b) plans may generally self-correct significant operational failures without
payment of any fee or sanction if the correction is made within certain deadlines.
VCP (voluntary correction with IRS approval). Even if a plan is not eligible for self-
correction, most plans may still be corrected at any time before audit, by paying a fee and
filing the required forms with the IRS. Once approved, the IRS will issue a “compliance
statement” confirming that the method of correction is adequate and that the IRS will not
take enforcement action with respect to failures disclosed in the application. Under VCP,
there are special procedures for Anonymous Submissions and Group Submissions.
Audit CAP (correction on audit). If a failure (other than an eligible failure corrected
through SCP or VCP) is identified on audit, the Plan Sponsor may correct the failure and
pay a sanction. Under the general principals of EPCRS, the sanction is intended to bear a
reasonable relationship to the nature, extent, and severity of the failure, considering the
extent to which correction occurred before audit.
Our firm works regularly on issues involving correcting mistakes in all types of employee benefits
plans, both within and outside of EPCRS. See Help! I Found a Mistake in my Employee Benefit Plan!
© Boutwell Fay LLP 2018, All Rights Reserved. This handout is for information purposes only, and may constitute attorney
advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or
would like our advice with respect to any of this information, please contact us. The information contained in this article is
effective as of July 31, 2018.