backPartial Plan Terminations: Recent Court Ruling Serves as a Reminder of the Risks
Author, Sam Choy, Atlanta, +1 404 572 4633, schoy@kslaw.com, and Ryan Gorman, Atlanta, +1 404 572 4609, rgorman@kslaw.com.
After what Judge Posner described as 19 "interminable" years of litigation, the latest round of Matz v. Household International Tax Reduction Investment Plan may be the last. In late December 2014, the 7th Circuit of Appeals rejected a class action claim that a qualified profit-sharing retirement plan experienced a partial termination by virtue of a unrelated series of corporate transactions that spanned a three year period, which, if sufficiently related, would have entitled the affected participants to immediate vesting of benefits.
Partial Termination
Code Section 411 (d)(3) generally provides that in the case of a partial termination of a qualified retirement plan, affected participants must be fully vested in their benefit under the plan. While Code Section 411(d)(3) does not provide additional guidance as to when a partial termination occurs, case law and guidance from the Internal Revenue Service ("IRS") explain how partial terminations can occur in the context of corporate transactions.
When a significant portion of participants in a plan cease to participate in the plan in connection with a transaction (because they are terminated from employment, an amendment reduces their benefits under the plan, or they are otherwise excluded from participating in the plan), a partial termination may have occurred.
A prior ruling in the Matz case adopted a 20% test for determining whether a partial termination had occurred, and this test was adopted by the IRS in Revenue Ruling 2007-43. This test generally provides that if an employer's actions eliminate 20% or more of a plan's participants during an applicable period (generally a plan year), the actions are presumed to constitute a partial termination. Generally, most employer-initiated actions that include a termination of employment are required to be included in this calculation.1 Also, in determining the percentage, if separate transactions are sufficiently related, the 20% test may be calculated based on the combined series of transactions and over the course of a time period longer than a year.
Matz v. Household International Tax Reduction Investment Plan
The Matz plaintiffs, participants in a profit-sharing plan, originally filed their complaint in 1996. From 1994 to 1996, their employer sold off various subsidiaries, which resulted in the plaintiffs and other participants losing their jobs. Because the employer contributions to the plan were subject to a 5-year vesting schedule, participants forfeited non-vested portions of their accounts. The plaintiffs argued that the transactions should be aggregated because they were sufficiently related to one another and, combined together, resulted in a partial termination.
After decades of procedural delays and fact-finding, in April 2014, a district court found that a partial termination did not occur because:
- There was no overarching reorganization plan for selling the subsidiaries;
- The decisions to sell were made sequentially rather than all at once;
- Each business was evaluated on its own terms and there was no major corporate event that drove the employee reductions over multiple years; and
- The time period chosen by the plaintiffs to determine a partial termination (1994-1996) was arbitrary (i.e. not tied to a specific event) and the plaintiffs simply carved out a time period in which a significant number of participants were terminated.
On appeal, the 7th Circuit noted that no single transaction resulted in a turnover rate greater than 5%, and even aggregated together, the turnover rate for all the transactions was about 17%. Accordingly, the 7th Circuit affirmed the district court's ruling that there was no partial termination.
The 7th Circuit reiterated that the period over which plan turnover may be aggregated to determine whether a partial termination occurs can expand beyond a plan year (recognizing the realities of corporate transactions); however, the facts here did not support a finding of a "related series of events."
Takeaways for Employers
Employers that have experienced, or expect to enter into, a significant corporate transaction should consider the risk of a partial termination of their qualified retirement plans. While the risk of a partial termination is not new, the Matz ruling serves as a reminder that a series of corporate transactions over several years may be aggregated together in determining whether a partial termination occurred. If those transactions are sufficiently related and participant count is significantly lowered as a result of those transactions, the IRS or a court could find that participants should be entirely vested in their accounts.
The partial termination issue may also arise in the course of due diligence in connection with mergers and acquisition transactions. If a potential target in an acquisition has a noticeable turnover rate within its qualified plan during a plan year or over the course of several years, further inquiry regarding the facts surrounding that turnover should be made.
King & Spalding is happy to answer any questions employers may have about the potential impact of partial termination on their qualified retirement plans, or any other questions about this recent development.
1Conversely, if an employee retires, voluntarily terminates employment, dies, or becomes disabled, such events should not be considered when determining whether a partial termination occurred. Similarly, if an employee transfers to another business unit within the same controlled group (and thus out of the plan in question), such a transfer is not to be considered for purposes of the 20% test.
February and March Filing and Notice Deadlines for Qualified Retirement and Health and Welfare Plans
Author, Ryan Gorman, Atlanta, +1 404 572 4609, rgorman@kslaw.com.
Employers and plan sponsors must comply with numerous filing and notice deadlines for their retirement and health and welfare plans. Failure to comply with these deadlines can result in costly penalties. To avoid such penalties, employers should remain informed with respect to the filing and notice deadlines associated with their plans.
The filing and notice deadline table below provides key filing and notice deadlines for the next two months. If the due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day. Please note that the deadlines will generally be different if your plan year is not the calendar year. Please also note that the table is not a complete list of all applicable filing and notice deadlines (including any available exceptions and/or extensions), just the most common ones. King & Spalding is happy to assist you with any questions you may have regarding compliance with the filing and notice requirements for your employee benefit plans.
|
Deadline |
Item |
Action |
Affected Plans |
|
February 14 (within 45 days after the close of the fourth quarter of previous plan year) |
Quarterly Fee Disclosure |
Deadline for plan administrator to disclose fees and administrative expenses deducted from participant accounts during the fourth quarter of the previous plan year. Note that the quarterly fee disclosure may be included in the quarterly benefit statement or as a stand-alone document. |
Defined Contribution Plans that allow participants to direct investments |
|
Benefit Statements for Participant-Directed Plans |
Deadline for plan administrator to send fourth quarter benefit statement for previous plan year to participants in participant-directed defined contribution plans. |
||
|
February 28 (if filing paper forms) |
IRS Form 1099-R |
Deadline for employer to file IRS Form 1099-R. If the form is filed electronically, the deadline can be extended until March 31.
|
Qualified Retirement Plans* |
|
March 1 (60 days after the beginning of the plan year) |
Medicare Part D Creditable Coverage Disclosure |
Deadline for employers that provide prescription drug coverage to Medicare Part D eligible individuals to disclose to the Centers for Medicaid and Medicare Services (CMS) whether the coverage is “creditable prescription drug coverage” by completing the Online Disclosure to CMS Form at https://www.cms.gov/Medicare/Prescription-Drug-Coverage/CreditableCoverage/CCDisclosureForm.html |
Health and Welfare Plans that provide prescription drug coverage to Medicare Part D eligible individuals |
|
March 15 |
Plan Contribution Deadline |
Deadline for corporate employer contributions to be made to plan trusts in order for such amounts to be deductible on corporate tax returns (assuming the employer is operating on a calendar-year fiscal year). Note that this deadline may be extended if an extension is obtained for the corporate tax return. |
Qualified Retirement Plans |
|
March 15 |
Excess Contributions |
Deadline for plan administrator to distribute any excess contributions and earnings from the prior year to avoid 10% excise tax on employer (other than eligible automatic contribution arrangements (EACAs)).
|
401(k) Plans Other Than EACAs |
|
March 31 |
Certification of Adjusted Funding Target Attainment Percentage (AFTAP) |
Deadline for actuary to certify AFTAP to avoid presumption that AFTAP is 10 points less than prior year AFTAP.
|
Defined Benefit Plans |
*Qualified Retirement Plans include all defined benefit and defined contribution plans that are intended to satisfy Code §401(a).
Announcing King & Spalding's Executive Compensation, Employee Benefits and Employment Law Roundtable.
Please join us once again at one of our three office locations listed below for a lively roundtable discussion via cross-office videoconference, moderated by King & Spalding executive compensation, employee benefits and employment lawyers to:
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