Pietzsch Bonnett & Womack, P

PIETZSCH BONNETT & WOMACK, P.A. An Affiliate of Polese, Pietzsch, Williams & Nolan, P.A.

ATTORNEYS

2702 North Third Street, Suite 3000, Phoenix, Arizona 85004-4607 Telephone: 602-604-6200

Client Advisory

July 2007

IRS Releases Guidance on Partial Plan Terminations

The Internal Revenue Service (“IRS”) has released Revenue Ruling 2007-43, addressing accelerated vesting as a result of the “partial termination” of a retirement plan under Internal Revenue Code (“IRC”) Section 411(d)(3). Under the ruling, if plan participation is reduced by at least 20 percent, a “partial termination” of that plan is presumed to have occurred. When there is a partial termination, all of the affected participants have to be immediately vested. This ruling could be very important for companies with numerous acquisitions and merger (or sales) activity. For example, if a company has 10,000 participants in the plan and sells off a division with 2,300 employees, those 2,300 employees would immediately become vested in the plan.

Prior to the new ruling, the IRS had not articulated a clear standard for determining whether a partial termination under IRC Section 411(d)(3) had occurred. At one time, the IRS used a 20 percent “rule of thumb” in determining whether a reduction in plan participation was significant, and therefore gave rise to a partial termination. The 20 percent rule of thumb has been widely relied upon by practitioners, and has appeared prominently in a number of court cases involving partial terminations. Revenue Ruling 2007-43 confirms this rule of thumb, indicating that the IRS will presume a partial termination to have occurred if there is at least a 20 percent reduction in a plan’s active participation. The Revenue Ruling also casts some light on the mechanics of measuring the percent reduction in plan participation.

If you have any questions, please contact Mike Pietzsch, of our Benefits and Compensation Group.

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