IRS Issues Additional Guidance on Partial Plan Terminations Related to COVID-19
June 2, 2021
The IRS recently released additional FAQs to help clarify the temporary partial plan termination rules during the COVID-19 pandemic and how a partial plan termination is determined during any plan year which includes the period beginning on March 13, 2020 and ending on March 31, 2021.
Whether a partial plan termination has occurred is generally based on the facts and circumstances, but there is a rebuttable presumption that a partial plan termination has occurred if 20% or more of a plan’s active participants have had an employer-initiated termination within a given plan year. Partial plan termination requires those participants covered under the plan that is terminated to be fully vested.
During the pandemic, many employers laid off and/or terminated employees. Some of these employees were rehired when businesses began to reopen while others were not. One common question that many employers asked is how do they account for these constant fluctuations in their workforce and at what point is a partial plan termination triggered?
In September of 2020, the IRS issued FAQs to clarify and help offer guidance to that question. The IRS essentially indicated that when an employee is terminated and rehired within 2020, they would not be counted for purposes of determining whether a partial plan termination occurred. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “Act”) provided additional relief to employers by modifying current partial plan termination rules for 2020 and 2021 to provide that a partial plan termination would not occur if the active participant count for the plan as of March 31, 2021 was at least 80% of the number of active participants in the plan as of March 13, 2020. The Act allows a different way to calculate whether a partial plan termination has occurred by looking at the percentage of active participants still in the plan. This is important and is a distinguishing factor when compared to how a partial plan terminations are typically calculated because instead of counting the percentage of active participants who were terminated, the IRS relief permits an employer to avoid a partial termination if new employees were hired and enrolled in the plan before March 31, 2021.
In light of this guidance, the IRS recently issued a list of additional FAQs on the partial plan termination provisions under the Act, clarifying the following points:
- A qualified retirement plan will not be treated as having a partial plan termination during any plan year that 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 was at least 80% of the number of active participants covered by the plan on March 13, 2020. “Active participant covered by the plan” is determined based upon a reasonable, good-faith interpretation of the term, applied in a consistent manner.
- The partial plan termination provisions under the Act apply for the entire plan year if any part of the plan year falls within the period beginning on March 13, 2020 and ending on March 31, 2021.
- The 80% test is applied by counting the number of “active participants covered by the plan” on each of the two specified dates. All “active participants covered by the plan” are counted on March 31, 2021 regardless of whether such individual was considered an “active participant covered by the plan” on March 13, 2020. The Act does not require the same individuals to be covered on the beginning and end dates — only that the number counted on March 31, 2021 includes all individuals who are active participants covered by the plan on that date. The IRS provides this example: “If a plan has a calendar year plan year, the 80% partial termination 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.”
- The reduction in the number of active participants is not solely limited to reductions related to the COVID-19 pandemic.