Generally, the Internal Revenue Code (Code) requires all unvested benefits to immediately vest when the (tax-qualified) plan is either terminated or the plan experiences a “partial termination.” 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. 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: (1) 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 (2) plan amendments that adversely affect the rights of unvested benefits.
The partial termination standard is based on facts and circumstances; however, Rev. Rul. 2007-43, provides a rebuttable threshold—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. An employer experiencing a 20% turnover in participating employees is still able to rebut the presumption of a partial termination, otherwise related unvested account balances must become vested.
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