Employers who are laying off a significant number of their employees will need to know that the layoffs may result in a “partial termination” of their retirement plan under the IRS plan qualification rules. A partial termination triggers 100% vesting for the affected participants.

The IRS ruled that if the turnover rate is at least 20%, there is a presumption that a partial plan termination has occurred. The turnover rate is determined by dividing the number of participating employees who had an employer-initiated severance from employment during the plan year by the total participating employees during the same period.

The IRS has not provided guidance as to whether the rehiring of the laid off employees within a short period is a factor to be taken into account in determining whether a partial termination has occurred.

In all events, laid off (terminated) employees also generally have a right to receive a distribution from the plan.