Most of us would be hard pressed to find anything positive to say about the Covid-19 pandemic. But, if you lost your job on account of the pandemic and were a participant in a pension plan where you had not yet vested in your pension, there may be a wee bit of good news.
Under the Internal Revenue Code, participants automatically become vested in their accrued pension benefits upon the termination or partial termination of the pension plan. In the case of a defined contribution plan (e.g., a 401(k) plan), the vesting is 100%. In the case of a defined benefit pension plan, participants become fully vested to the extent the plan is funded.
A partial plan termination occurs when an employer terminates a substantial percentage of employees who were previously covered by the plan. The IRS uses a facts and circumstances test to determine whether the percentage is substantial, but presumes this is the case if 20% or more of plan participants were involuntarily terminated during the measuring period (usually the plan year in which the employees were separated). To illustrate, here are three situations where the IRS found a partial plan termination.
Situation No. 1
Plan A provides that employees are fully vested after completing 3 years of service. The employer sponsoring the Plan ceases operations at one of its four business locations. As a result, 23% of the participants in Plan A are separated from employment and cease participation in the Plan.
Situation No. 2
An employer establishes a pension plan that covers all 15 of its employees. The employer later acquires a new business location l00 miles away and closes the original location. All employees are given the opportunity to transfer to the new location and continue to participate in the plan, but only 3 choose to do so. The other 12 employees are discharged, ending their participation in the plan.
Situation No. 3
An employer establishes a pension plan that covers 165 employees in the two divisions of its business. The employer closes down one division, thereby terminating 95 participants and their participation in the plan.
In all three situations, there was a partial plan termination. As a result, the terminated employees who were not vested in their accrued pension benefits before their separation became vested.
Being aware of the partial plan termination rules could be of tremendous help to you financially if your employment was terminated due to the Covid-19 pandemic, as many employers are insufficiently familiar with those rules. One caveat: If you return to work for the same employer before the end of the plan year, you are not an “affected participant” and, therefore, will not vest under the partial plan termination rules. Rather, your vesting will depend on whether and when you satisfy the plan’s service criteria for vesting.
There are other situations that may also be deemed a partial plan termination. For example, if the employer adopts an amendment to the plan that excludes a substantial number of employees from participation in the plan, or that changes how vesting service is calculated, that may also constitute a partial plan termination. However, the rules governing partial plan terminations are complex and technical. Therefore, if you believe you may be entitled to a pension under those rules, you would be wise to discuss that possibility with an experienced pension lawyer.
[To read more pension and retirement posts I have written, go to my Pension Justice 4 You Facebook page. To receive automatic notifications of new posts on that page, please click the Like and Following tabs just below the picture at the top of the page. For a free telephone consultation about your pension problem, please contact me, Eva Cantarella, at [email protected] or [email protected] or 248-335-5000.]