Can High Annual Employee Turnover Trigger a Partial Plan Termination?

Q: I read with interest your Ask the Experts column on retirement plan considerations when laying off employees, which stated that the IRS flags situations for possible partial plan termination where at least 20% of active plan participants lose coverage under the plan due to an employer-initiated termination. We are a home health care provider where annual turnover rates exceeding 20% are the norm rather than the exception. Should I be concerned about a partial plan termination situation?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Although the Experts would suggest consulting with outside ERISA counsel with regard to whether a partial plan termination has occurred, since it is a facts-and-circumstances determination based on your particular situation, the IRS has addressed this particular situation in a Q&A on partial plan terminations, suggesting that routine turnover during the year is sometimes not considered a partial termination, which likely includes high-percentage turnover, such as what occurs in a number of nonprofits. The IRS lists several factors that would be used in determining whether the turnover in question is, in fact, routine:

• information on the turnover rate in other periods and the extent to which terminated employees were actually replaced,
• whether the new employees performed the same functions,
• whether the new employees had the same job classification or title, and
• whether the new employees received comparable compensation.

Note that high employee turnover can also be problematic for retirement plans for reasons other than triggering a partial plan termination, so plan sponsors should work to manage such turnover.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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