What is the Impact of the CARES Act and COVID-19 Pandemic on Employee Benefit Plans and What Should You Do Now?
Part Two: Effect of Layoffs and Furloughs on Benefit Plans, Partial Plan Terminations
Yesterday we gave a few tips to help you know what to do if you decide to make changes to your retirement plan loan and distributions provisions or eliminate or modify the contributions to your retirement plans. Today, we’re talking about the effect of layoffs and furloughs on the administration of retirement plans.
Partial Plan Terminations
Large-scale reductions in force may have unintended consequences for an employer’s retirement plans. Under the Code, a “partial plan termination” occurs when there is a sharp decline in the number of participants in a retirement plan. Whether a plan experiences a partial termination is a question of facts and circumstances. However, the IRS has indicated that there is a rebuttable presumption that a partial termination will have occurred if at least 20 percent of a plan’s participants are terminated by the plan sponsor from employment within a specific period.
If the plan sponsor cannot provide sufficient evidence to show that the turnover rate was routine or was not the result of employer-initiated severance from employment, the presumption of a partial termination will stand and the participants who are terminated by the plan sponsor during the partial termination “measurement period” (and potentially including those who voluntarily terminated during the partial termination “measurement period”), must be fully vested in their account balance (or accrued benefit, as applicable) as of the date of the partial plan termination in order for the plans to continue to be qualified under the Code. The IRS has not issued any guidance at this time about whether an exception may be carved out for layoffs or furloughs resulting from the COVID-19 situation. However, if a layoff or furlough of employees is temporary and the affected employees resume active participation in the plan, those employees should not count toward determining whether a partial plan termination has occurred.
What Should you Do Now?
For more resources and LP's response to COVID-19, visit this webpage.