Tax Matters

A Pink Slip and a Vest

october 2007

In a revenue ruling, the IRS further standardized a benchmark it first proposed in 1991 for determining when a partial termination of a defined contribution retirement plan under IRC section 411(d)(3)(A) has occurred. The provision comes into play often when employers downsize, as in the scenario of the ruling, 2007-43, which was released in June. Under the statute, a termination or partial termination of a qualified plan results in the immediate vesting of all affected employees. Corresponding regulations provide only a facts-and-circumstances standard for determining how many layoffs constitute a partial termination. “So vague a regulation is no help to anyone,” said the Seventh Circuit Court of Appeals in Matz v. Household International Tax Reduction Investment Plan , 94 AFTR 2d 2004-6781 (2004). The court reached back 13 years for a benchmark in an amicus brief filed by the IRS in another case. In the earlier case, Weil v. Retirement Plan Administrative Committee , 67 AFTR 2d 91-1131 (2nd Circuit, 1991), the IRS said a partial termination may be presumed to have occurred when severance turnover is at least 20% of participating employees. In the recent revenue ruling, the IRS applied that standard to an employer that closed one of its four business locations, laying off 23% of its plan participants.

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