IRS Clarification on Partial Plan Termination
17 November 2020
The impact of COVID-19 has forced many plan sponsors to furlough or lay off employees. With the uncertainly surrounding 2020, you may not know if you will be able to bring some or all of these employees back to work. With that being said, it is important to consider the effects this could have on your retirement plan, especially when determining if a partial plan termination has occurred.
Depending on the facts and circumstances, your plan may have a partial termination. This can happen if an action by the employer causes a significant decrease (generally at least 20%) in plan participation. Layoffs, plan amendments, or business reorganizations that cause a decrease in plan participation are counted even if they result from economic circumstances beyond the employer’s control. The law requires all affected employees to be fully vested in their account balances as of the date of a partial plan termination. They must become 100% vested in all employer contributions regardless of the plan’s vesting schedule.
There were many questions related to how this would impact the plan if the employees were brought back to work before the end of 2020. To clarify this matter, the Internal Revenue Service (the “IRS”) updated its Q&As relating to the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act:
Question: Are employees who participated in a business’s qualified retirement plan, then laid off because of COVID-19 and rehired by the end of 2020, treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the plan occurred?
Answer: Generally, no. Subject to the facts and circumstances of each case, participating employees generally are not treated as having an employer-initiated severance from employment for purposes of calculating the turnover rate used to help determine whether a partial termination has occurred during an applicable period, if they’re rehired by the end of that period. That means participating employees terminated due to the COVID-19 pandemic and rehired by the end of 2020, generally would not be treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the retirement plan occurred during the 2020 plan year.
This guidance provides relief for a number of employers that plan to, or have already brought employees back to work. However, a partial plan termination may have still occurred. It is important to discuss this with your third-party administrator or ERISA counsel to ensure that you are following all plan rules.