Recently published IRS Q&As clarify several aspects of the partial termination relief for retirement plans included in the appropriations and pandemic relief package (Pub. L. No. 116-260) enacted at the end of 2020. Although the Q&As are helpful, additional guidance is needed for employers that concluded they had a partial termination and vested affected participants before Congress enacted the relief.
A partial termination is presumed to occur when involuntary terminations during a plan year are 20% or more of the plan’s number of active participants at the beginning of the year. A partial termination requires full vesting of all affected participants’ benefits, to the extent funded. Under the relief, a plan won’t have a partial plan termination for any plan year that includes the period beginning March 13, 2020, and ending March 31, 2021, if the number of active participants at the end of that period is at least 80% of the number at the start of the period. The relief allows employers with a large workforce reduction during the pandemic to avoid the cost of a partial termination if they quickly restored their workforce.
The new IRS guidance says the following:
Some employers may have determined that a partial plan termination occurred — and vested affected participants accordingly — before the relief was enacted. For example, if an employer whose plan year starts July 1 had a significant workforce reduction during the plan year that ended on June 30, 2020, the employer may have concluded at plan year-end that a partial termination occurred and vested the affected participants. But if this employer later increased its workforce so the number of active plan participants on March 31, 2021, reached at least 80% of the number on March 13, 2020, the employer apparently is still eligible for the relief.
For employers in this situation, applying the relief now would essentially require “unvesting” the affected participants — which would seem to violate the Internal Revenue Code’s vesting rules. These employers need additional IRS guidance on how to proceed. IRS might have decided this technical issue requires more formal guidance than a website Q&A, so additional guidance may be in the works.
• Partial plan termination relief not a free pass for reportable events (Feb. 25, 2021)
• Virus aid bill offers help for retirement plans, student loans (Jan. 6, 2021)