Has your organization laid off employees this year because of the COVID-19 pandemic, but you plan to rehire some of them before the end of 2020? Or maybe you already have? If so, and you offer a qualified retirement plan, the IRS recently issued an important clarification regarding whether partial termination of a qualified plan occurs under such circumstances.

Partial Plan Termination

According to Internal Revenue Code Section 411(d)(3), a qualified plan must provide that, upon its ‘partial termination,’ the rights of all affected employees to benefits accrued to the date of the partial termination are nonforfeitable. This applies to the extent a plan is funded on that date or to amounts credited to the account.

The IRS determines whether a partial termination of a qualified plan has occurred (and the time of the termination) by looking at the facts and circumstances of each case. Facts and circumstances include:

• The exclusion, by reason of a plan amendment or employer-initiated severance, of a group of employees who have previously been covered by the plan
• Plan amendments that adversely affect the rights of employees to vest in benefits under the plan

Impact Of COVID-19

The clarification provided by the IRS comes in the form of a question and answer. The agency asks, “Are employees who participated in a business’ 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?” The IRS answers:

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 are 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.

Easy To Overlook

The COVID-19 crisis has led many employers to temporarily reduce the size of their workforces with the hope of bringing back some employees when safe and feasible. One easy-to-overlook way this is affecting organizations is the compliance impact on employee benefits. Please contact us for assistance in understanding the qualified plan rules.