Companies planning layoffs to address the economic slowdown should be forewarned: If a company with a retirement plan terminates the employment of enough people, it may inadvertently increase its retirement plan obligations.

Laying off a lot people sometimes triggers what's called a "partial termination," which means that the company is terminating the qualified retirement plan for a certain group of employees while continuing it for others. In cases of partial termination, the employer is required to vest all employees losing their jobs in the layoff at a 100 percent level. That means the employer must make additional contributions to the retirement plans of the partially vested employees who are losing their jobs.

The Internal Revenue rule for determining if a layoff triggers a partial termination of the retirement plan contains some surprising flexibility. The rule in question states that determining whether or not there should be a partial termination of the retirement plan depends on the facts and circumstances of the layoff.

But if there is a 20 percent decline in the number of participants in a plan on an involuntary basis, then the IRS will typically assume that a partial termination has occurred. The 20 percent level is not hard and fast, though. For example, an employer that can prove that it has a high normal turnover rate may be able to convince the IRS that there has not been a partial termination of the plan even if it lays off more than 20 percent of those in it.

The IRS rule on partial terminations affects both defined contribution and defined benefit retirement plans. All employees in the retirement plan, vested and unvested, are taken into account in calculating the turnover rate.

-- Herb Wolfson,
Wittlen Simon & Newman,
wsnpc@msn.com

Sometimes smaller companies want to give employees some of the options available under the Family and Medical Leave Act, which only covers employers with at least 50 employees within a 75-mile radius. But a recent court case should be a warning that when a small company builds some FMLA rights into its employment policies that it may in fact be required to accept all of the many FMLA mandates.

In the case in question, the handbook of a small company allowed employees to take FMLA leave for the birth of a child, defining "eligible employee" in the same way that the FMLA does. An employee took leave, but was fired a few days prior to the end of that leave. The company argued that the case should be dismissed because the company had fewer than 50 employees within a 75-mile radius and therefore was not covered by the FMLA. But the judge ruled that the employee could proceed with the FMLA claim.

Although the case does not directly affect employers in Pennsylvania, it should be a reminder that by giving employees rights under the FMLA, the employer may bind themselves to other provisions of the FMLA such as being obligated to guarantee that employees will be restored to their original or a comparable job with equivalent pay, benefits, and other terms and conditions of employment after a leave or to provide health care insurance during the leave.

Companies should review their handbooks to ensure that their policies are not creating unintended consequences and are in compliance with current changes to employment laws.

-- Elaina Smiley,
Meyer Unkovic & Scott,
es@muslaw.com