7th Circuit Stakes Out Partial Plan Termination Boundaries
The 7th U.S. Circuit Court of Appeals has outlined the conditions for determining the existence of a partial plan termination, ruling on the fifth appeal of what it called a “seemingly interminable class action suit.”
The ruling came in a case filed two months short of 19 years ago. The plaintiffs in the case claimed that a series of layoffs and subsidiary closings over a period of years constituted a partial plan termination. As such, they claimed, it should have served to fully vest their employer matching accounts in a DC plan.
Household International, Inc., began selling off a number of subsidiaries in 1993 as part of a restructuring plan that Robert Matz, the lead plaintiff in the case, claimed eventually included elimination of other subsidiaries and worker layoffs in 1994, 1995 and 1996. Considered separately, these events did not reach the 20% threshold to be considered a partial plan termination, and so participants were not deemed to be 100% vested in their company match accounts.
After a brief discussion as to the proper rationale for full vesting in the case of a partial termination, the court said that its decision “…turns on ascertaining whether a termination of some plan participants (as by terminating their employment) amounted to a partial termination of the plan, thereby requiring full vesting of plan benefits in the terminated plan participants.”
Setting a Standard
The court noted that there “…was no usable statutory or regulatory definition of ‘partial termination’ when this case began,” leading it to adopt its own in a 2004 opinion which held that there is “…a rebuttable presumption that a 20 percent or greater reduction in plan participants is a partial termination and that a smaller reduction is not.” The court also ruled that a reduction of less than 10% should be conclusively presumed not to be a partial termination, while above 40% should always be considered to be a partial termination.
The court went on to note that while IRS adopted the 7th Circuit’s suggested 20% presumption in Revenue Ruling 2007‐43, the IRS has never specified a percentage below which there would be a conclusive presumption that no partial termination had occurred. As a result, the opinion broke new ground, if only in dicta.
The percentage determination notwithstanding, the 7th Circuit explained that in general, the period over which plan reductions may be aggregated to determine whether a partial termination has occurred is a single plan year. The court pointed out, however, that an earlier, 2000 decision in the case acknowledged that nothing “requires a significant corporate event to occur within a plan year.” As a result, Matz could aggregate all terminations of employment from 1994, 1995 and 1996, but only if he could show that the corporate events of those years were related.
In the most recent opinion, the 7th Circuit said it believes this view “…reflects the realities of the modern corporate world. Mergers and corporate reorganizations have grown into large and complex events, and often cannot be completed in one year. Furthermore, to establish a rigid rule that only terminations in individual plan years can be counted allows an unscrupulous employer to terminate some participants in December of one year and January of the next year, thereby eviscerating … the purpose of protecting employee benefits.”
In sum, the court held that participant terminations in multiple years can be aggregated to determine the existence of a partial plan termination if the multiple year terminations are proven to be related.
In deciding the case at hand, however, the 7th Circuit upheld the determination of the district court that the terminations in different years were not related because “…the decisions to sell particular subsidiaries had been made sequentially, on the basis of economic conditions in the particular market in which each subsidiary operated, and that these conditions had varied from market to market.” As a result, the appeals court affirmed the district court’s dismissal of the case.
The court also noted that, even if the reductions were considered as a single event, the percentage of participants terminated would still only total 17%, below the 20% threshold.