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ERISA Update: Partial Plan Termination Relief

2/2/21 – Kerri Walz

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On December 27, 2020, the Consolidated Appropriations Act, 2021 (CCA) was signed into law.  This includes a temporary rule providing COVID-related relief for certain partial plan terminations. 

Generally, the IRS defines a partial plan termination as more than a 20% reduction in the number of covered participants during a plan year.  If a plan determines that it has a partial plan termination, then affected participants (the participants that have lost their jobs) are immediately 100% vested in the part of their accounts attributable to employer contributions including earnings on those contributions. 

The new temporary relief under the CAA, Title II, Section 209, specifically states:

“A plan shall not be treated as having a partial plan termination (within the meaning of 411(d)(3) of the Internal Revenue Code of 1986) 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 percent of the number of active participants covered by the plan on March 13, 2020.”

For example, if a plan sponsor had 100 participants on March 13, 2020, and they laid off 25 employees during 2020, the plan sponsor would have 75 participants as of December 31, 2020. Prior to the temporary relief, there would be a partial plan termination since the plan had a 25% reduction.  However, let’s assume that subsequent to year end, but before March 31, 2021, the plan sponsor rehires 15 of the previous laid off employees and now has 90 participants (or 90% of the participants on March 13, 2020).  There would be no partial plan termination for 2020 due to the temporary relief.

The intention of the provision was to provide relief for the 2020 plan year by allowing employers to wait until March 31, 2021, to determine whether there has been a partial plan termination for 2020. 

A plan sponsor does not have to rehire the same employees that were laid off but, if a plan sponsor decides to hire new employees instead of rehiring the previously laid off participants, the answer in the above example could change depending on the eligibility conditions of the plan.  If there are no eligibility conditions, the new employees would enter the plan on their date of hire and there would be no partial plan termination.  However, if the plan has eligibility conditions, it would depend on when the new hires would become participants in the plan on or before March 31, 2021.

Some plan sponsors may have already determined that a partial plan termination occurred, and benefits may or may not have already been distributed based on the initial determination.  However, due to the new relief, a plan sponsor may determine that a partial plan termination did not exist subsequently and this could lead to potential questions and challenges. 

VonLehman’s team of employee benefit plan experts can help plan sponsors work through these issues. For guidance or further information, please contact Kerri Walz at kwalz@vlcpa.com or 800.887.0437.