IRS Adds “Gloss” to Partial Plan Termination Temporary Relief in New FAQs

On April 27, 2021, the IRS updated its Coronavirus-Related Relief for Retirement Plans and IRAs FAQs to add guidance for partial termination of a qualified retirement plan under Section 209 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020.

Section 209 provides that a plan is not treated as having a partial termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if 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.

According to the IRS, the new FAQs clarify how partial terminations are determined during any plan year that includes the period beginning on March 13, 2020, and ending on March 31, 2021. The new FAQs clarify the following issues:

Definition of active participant covered by the plan. The guidance provides that, for purposes of Section 209, “a reasonable, good-faith interpretation of the term ‘active participant covered by the plan,’ applied in a consistent manner, should be used when determining the number of active participants covered by a plan on March 13, 2020, and March 31, 2021.” 

Application of March 2020 to March 2021 Period to calendar plan year. If any part of the plan year falls within the period beginning on March 13, 2020, and ending on March 31, 2021, then Section 209 applies to any partial termination determination for that entire plan year. For example, if a plan year has a calendar year, the 80% partial termination test applies to both the January 1 to December 31, 2020, plan year and the January 1 to December 31, 2021, plan year, because both plan years include a part of the statutory determination period of March 13, 2020 to March 31, 2021.

Application of the 80% partial termination test. The temporary rule is applied by counting the number of active participants covered by a plan on both March 31, 2021 and on March 13, 2020. The number of active participants covered by a plan who are counted on March 31, 2021, includes all individuals who are active participants covered by the plan on that date, regardless of whether those same individuals were active participants covered by the plan on March 13, 2020.

Application of the temporary rule to reductions in the number of active participants for reasons not related to COVID-19.  Although the first day of the statutory determination period (March 13, 2020) is the date the COVID-19 national emergency was declared, the temporary rule is not limited to reductions related to the COVID-19 national emergency.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 678-439-6236.

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