There’s some potential good news for retirement plan sponsors in the new Consolidated Appropriations Act, 2021 (CAA) signed into law on Sunday night. It includes a temporary rule preventing partial plan terminations for qualified retirement plans in some circumstances. This affects both defined contribution and defined benefit plans.
What Is a Partial Plan Termination?
A partial plan termination is a vesting event that occurs when more than 20% of a retirement plan’s participants are involuntarily terminated during the plan year. If a partial termination takes place, all “affected employees” must be fully vested in their retirement plan benefit, regardless of whether they earned enough service as of their termination date to be 100% vested under the plan’s vesting schedule. An “affected employee” is generally anyone whose employment is terminated for any reason (including a voluntary termination) during the plan year in which the partial termination occurs and who had an account balance or an accrued benefit in the retirement plan at any point during that plan year.
A partial termination often happens in connection with a significant company event, such as the closing of a plant or as a result of a reduction-in-force due to economic events not within the employer’s control, like many experienced this year. Routine turnover does not normally cause a partial termination, but the determination is based on each employer’s specific facts and circumstances.
What Does the New Law Do?
The IRS previously issued guidance under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) clarifying that employees furloughed or laid off due to COVID-19 but rehired by the end of 2020 would not be counted in determining whether a retirement plan incurred a partial plan termination for the plan year.
The CAA gives employers broader relief than the IRS guidance. Under this new law, a retirement plan will not have a partial termination for a plan year if: (1) any portion of the plan year includes the period beginning March 13, 2020, and ending March 31, 2021; and (2) the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.
The CAA is particularly good news for employers that terminated more than 20% of its workforce during the COVID-19 pandemic, but whose businesses bounce back enough to enable them to bring back a sufficient number of employees by March 31, 2021, so that the resulting number of terminated retirement plan participants ends up below the 20% partial termination threshold by that date.
We expect the IRS will issue guidance to assist employers in implementing this relief.
What Employers Should Do Now
If your company experienced a significant workforce reduction this year, be sure to contact Jennifer Watkins, Lisa Zimmer or a member of Warner’s Employee Benefits/Executive Compensation Practice Group to help you determine how the partial termination rules and this temporary relief might impact your retirement plan.