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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

According to the IRS, both vested as well as non-vested participants are to be taken into account in calculating the 20 percent number. However, in Matz v. Household International Tax Reduction Investment Plan, the Seventh Circuit held that only nonvested participants needed to be counted in determining whether a partial termination occurred.

What time period is to be looked at to determine if the 20 percent threshold is met? We do not know. Again, it is a facts and circumstances test. The IRS indicates that a plan sponsor should aggregate all employer initiated terminations during a rolling two- year period, unless the employer can establish the employment terminations were unrelated.

Because retirement plan participants must be 100 percent vested in their employer contribution accounts as a consequence of a partial termination, employers must carefully examine the potential impact of the partial termination rules before implementing a reduction in force, business merger or divesture, site closing, or adopting a plan amendment that excludes a group of employees from plan participation.



As the economic outlook remains challenging, many employers have little choice but to face the difficult decision to reduce employee benefit programs and, in some cases, reduce their workforce. Under such exceptional circumstances, employers are sometimes prone to making decisions without full consideration of the employee benefit landmines to which they are easily susceptible.

The wrong decision can actually add to the employer’s financial burden. As a result, before any workforce reduction is contemplated or change is made to an employee benefit program, an assessment should be made as to what was promised, and whether what was promised can be changed.

Did the plan sponsor reserve the right to amend, modify, or terminate the plan? What are the potholes in reducing an employee benefit arrangement? Has the likelihood of lawsuits and a decline in morale been considered? A thoughtful and deliberate approach to these important decisions is the only true safe course.

Copyright Aspen Publishers, Inc. Sep 2009

© 2009 Employee Benefit Plan Review. Provided by ProQuest LLC. All rights Reserved.

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