COVID-19 and Layoffs: Has Our Company Triggered a Partial Retirement Plan Termination?

Many employers have been forced to reduce their workforce during the COVID-19 pandemic through layoffs or furloughs. These workforce reductions may trigger a partial retirement plan termination, which then requires 100% vesting of affected participants.

Employers that rehire laid off or furloughed workers by the end of 2020 may be wondering if they have still triggered a partial termination. The IRS recently updated its Q&As regarding the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide guidance on this issue.

Partial Plan Termination

When a qualified retirement plan is terminated, the rights of plan participants fully vest. A partial termination also results in 100% vesting for all affected participants. The IRS presumes a partial termination has occurred when there is a turnover rate of at least 20% due to an employer-initiated reduction in workforce during a plan year. That presumption may be refuted depending on the facts and circumstances of each case.

Updated IRS Guidance

On July 30, 2020, the IRS added the following guidance via its CARES Act Q&A section:

Q15. 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?

A15. 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 is good news for employers that are considering bringing laid off or furloughed workers back to work by the end of 2020. In some cases, employers may be able to avoid an expensive vesting event if returning workers reduce the turnover rate to below 20%. However, if the reduction was part of a series of severances over several years, a partial plan termination may still occur. Again, this is dependent on the facts and circumstances of each case.

Hall Benefits Law’s vision is to provide every client with the peace of mind that comes from the confidence that HBL has addressed all possible compliance vulnerabilities. To learn more, call our team of responsive, experienced ERISA and employment counsel at 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.