A partial plan termination is an IRS term that refers to a significant decline in the number of plan participants in a single year. A partial plan termination may occur due to a corporate event, or a series of related events, e.g. plant closures, that results in the layoff of affected employees. It can also occur due to general employee turnover during adverse economic conditions or other reasons that are not within the employer’s control. A partial plan termination can also occur due to a discretionary plan amendment that excludes employees from the plan who were not previously excludible or that adversely affects their vesting.
In general, the IRS presumes that a partial plan termination occurs in any plan year in which there is a reduction in the number of participants of more than 20%. However, the IRS will consider a drop in participation of 20% or less in a single year as a potential audit issue and investigate the relevant facts and circumstances that caused that drop if it was historically unusual for that plan.
If a partial plan termination occurs, the group of affected participants will automatically become 100% vested in all employer contributions, regardless of the plan's vesting schedule. However, if a partial plan termination was caused due to layoffs, the group of affected employees entitled to accelerated vesting does not include those who the employer involuntarily terminated or who voluntarily quit during the year of the partial plan termination.