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Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Employee Benefit Plan Review

September 17, 2009

The court concluded that obtaining waivers of employment-related claims cannot be distinguished from these legitimate purposes because each involves, at bottom, a quid pro quo between the plan sponsor and the participant; that is, the employer promises to pay increased benefits in exchange for the performance of some condition by the employee.

The Supreme Court observed that an employer can ask an employee to continue to work for the employer, to cross a picket line, or to retire early. The execution of a release of claims against the employer is thus functionally no different and, like these other conditions, it is an act that the employee performs for the employer in return for benefits.


Tough economic times, sometimes force employers to significantly reduce their workforces. One aspect of reduction in force that is often overlooked, is the potential impact of the reduction in force on the employer’s qualified retirement plans.

A hidden and potentially costly consequence of a significant reduction in force, or a series of reductions in force is that the employer’s tax qualified retirement plan may experience a “partial termination.”

The law requires all affected retirement plan participants be 100 percent vested in their account balances upon the date of a partial plan termination. A 401(k) Plan participant’s elective deferrals are, of course, always 100 percent vested.

Employer contributions, however, are not required to be fully vested, and are usually subject to a vesting schedule. Upon a full or a partial retirement plan termination, the plan’s vesting schedule is disregarded. Instead all matching contributions or any other employer contributions to the retirement plan immediately become 100 percent vested for all affected participants.

Whether a partial termination occurs depends on the facts and circumstances of each case. Generally, a partial termination is deemed to occur when an employer-initiated action results in a workforce reduction of at least 20 percent.

In determining whether a partial plan termination has occurred, the IRS and the Courts have focused on the following four factors:

1. The percentage of employees affected;

2. The time period during which the terminations occurred;

3. The presence of a corporate event (such as a merger or a divestiture); and

4. Evidence of good faith on the part of the employer.

To determine whether the 20 percent threshold amount has been met, the IRS requires plans sponsors to take into account all terminated participants unless the plan sponsor can show that the employment terminations were voluntary, for cause, on account of death, disability or retirement.

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