Consider the following guidance fromTHE 2009 AICPA ACCOUNTING AND AUDITING GUIDE FOR EMPLOYEE BENEFIT PLANS.
12.21 – Upon full or partial termination of a plan, affected participants become fully vested in accrued benefits at the termination date. A partial termination can occur if approximately 20 percent or more of plan participants are terminated by the plan sponsor as a result of an action, such as a plant closure, a decision to downsize, or the termination of a product line. The reduction can accumulate over 1 or more plan years and still be classified as a partial termination. Judgment is needed to determine whether a partial termination has occurred. Consultation with the IRS or qualified legal counsel may be necessary if questions arise regarding the occurrence of a partial plan termination. Consideration also may be given to determine that terminated participants received their fully vested benefits and that there were no forfeited amounts.
THE 2009 AICPA AUDIT RISK ALERT FOR EMPLOYEE BENEFIT PLANS:
27 – In addition, the significant number of lay-offs at plan sponsors will affect employee benefit plans. For a defined benefit pension plan, this may add to the liquidity issues that the plan faces. For a defined contribution plan, a provision of the Internal Revenue Code (IRC) requires that all participants be fully vested in the event of a partial termination. This is a technical term that does not have a clear definition. It has been interpreted to apply where 20 percent or more of the workers have lost their jobs due to an event such as a plant closing or economic downturn. Because many plans use forfeitures to reduce employer contributions or to pay expenses, it is important for the client to properly identify when such a partial termination has occurred. See paragraph 12.21 of the Audit and Accounting Guide Employee Benefit Plans for further guidance.
MESSAGE POINT:
For companies, which have reduced their workforce over a period of time by 20% or more, a careful evaluation is required to determine and conclude whether the Company’s defined contribution plan (i.e. 401(k) plan) is required to follow accounting for a partial termination. Plans that do not properly account for partial terminations may be subject to penalties and breach of fiduciary responsibility, since the Plan may have improperly re-allocated unvested balances as forfeitures to remaining participants in the Plan or used the unvested balances for administrative expenses.
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