The 401(k) partial-termination trap will cost you more than the RIF saved.
A RIF that crosses the IRS partial-termination threshold forces full vesting of unvested employer 401(k) contributions. Most operators calculate this after the notices go out.
You are planning a reduction in force. You have modeled severance, WARN Act exposure, and unemployment insurance rate increases. You have not modeled what happens to your 401(k) plan if the headcount cut crosses the IRS partial-termination threshold. The IRS generally treats a reduction of 20 percent or more of plan participants in a single plan year as a partial termination. When that threshold is crossed, every affected employee must be fully vested in employer contributions immediately, regardless of where they sat on your vesting schedule.
Most operators find this out after the RIF closes, when the plan administrator runs the annual census and flags the problem. At that point the liability is fixed. You owe the unvested balances to separated employees, you may owe corrective contributions if accounts were already forfeited, and you are looking at a plan-qualification issue with the IRS if you do not fix it. The math is not abstract: a company with 60 plan participants that cuts 15 people has likely crossed the threshold, and if those 15 employees each had $8,000 in unvested employer contributions, the surprise bill is $120,000 before any correction costs.
Run the participant count before you finalize the separation list, not after the notices go out, because the threshold calculation is based on who was in the plan at the start of the year versus who leaves.
What the threshold calculation actually requires
The IRS looks at the ratio of terminated participants to total participants at the start of the plan year. Voluntary terminations count. Involuntary terminations count. The 20 percent figure is a general guideline, not a bright line; courts have found partial terminations at lower percentages when the facts supported it. Your plan document and your ERISA counsel set the floor, not your intuition about what feels significant.
The calculation also aggregates across the plan year. If you did a small cut in January and you are planning a larger one in October, the IRS adds them together. Serial reductions designed to stay under the threshold have been challenged. Splitting a RIF across two calendar years does not solve the problem if the plan year does not reset cleanly between them.
What to do before the separation notices go out
Pull your plan's participant count as of the first day of the current plan year. Count every employee who has separated since that date, for any reason. Add the employees on your proposed separation list. Divide that total by the opening participant count. If you are approaching 20 percent, get your ERISA counsel and your plan administrator on a call before you finalize the list.
If the threshold is crossed, full vesting is mandatory and retroactive to the termination date. You cannot unwind it by rehiring or by amending the plan after the fact. The only variable still in your control at that point is whether you catch it before the IRS does. Run the numbers this week, before the separation list goes to legal for review. If you want to work through the calculation and the downstream plan-qualification exposure in a structured conversation, book a 45-minute working session at peoplepartners.ai/contact.