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Partial Plan Terminations

By Marcia S. Wagner

As a result of the current economic downturn, scores of law firms have been forced to lay off large numbers of both legal and administrative employees. Management teams should be aware that reductions in workforce (“RIFs”), while seemingly cost-cutting in nature, can actually yield the opposite result, and can cause unintended and costly consequences with respect to a firm's tax-qualified employee benefit plan.

Many employers, in the legal field and otherwise, are blissfully unaware that a tax-qualified plan that incurs a so-called “partial plan termination,” or a significant reduction in plan participation, must immediately vest all affected participants. This rule is intended to prevent greedy employers from terminating large numbers of non-highly compensated employees in order to gain control of their resulting forfeitures. This article summarizes the applicable law regarding partial plan terminations, so that employers contemplating a RIF may avoid any unintended consequences.

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