There is much discussion in retirement plan publications about “partial termination” of retirement plans and vesting of employee accounts in 401k and Profit Sharing Plans, given the employment “actions” taken by businesses since early 2020 related to the coronavirus-related pandemic.
Partial termination is a phrase that describes a “significant-enough” reduction in the number of employees actively covered by the Plan, so that the Plan accounts of these affected former employees must be made fully vested, rather than applying the vesting schedule and vesting percentages under the Plan terms. What is “significant-enough” to trigger the partial termination requirements depends upon the facts and circumstances – who, when, why, how many terminated, over how long a period, and how many remain – and often is a “judgment call”. Unfortunately, the IRS and Courts may look at the situation after the fact, when it is difficult and expensive to undo what has been done.
Some employers treated their layoffs in 2020 as a layoff and not a termination of employment, and subsequently the employees returned to work. As such, there is no termination distribution event for Plan purposes. Similarly, despite the reduction in hours, without a termination of employment, there is no partial termination of the Plan.
Other employers terminated employees, even though they intended to attempt to rehire the same people if things improved. As long as the termination of employment is not a “subterfuge” (a word used by the IRS, in informal guidance, when the termination of employment is not “real” but is used to allow what is effectively an in-service distribution with a specific intent to rehire after the distribution occurs), there is a termination distribution event for Plan purposes. Similarly, there may be a partial termination of the Plan requiring full vesting of those who were terminated.
The recent pandemic-related legislation (the Consolidated Appropriations Act of 2021) that was signed into law on December 27th, includes limited relief from the partial termination rules:
“A plan shall not be treated as having a partial 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.”
In other words, hiring-and-firing during the 12+ month period ending March 31, 2021 potentially may not trigger a partial termination. Instead, a comparison of participant counts on “snapshot” dates at the beginning and end of the period may provide relief. The rationale is that the employer may have relief if, after being forced by the pandemic to terminate employees in 2020, the hoped-for-economic-recovery permits the employer to rehire many/most/all of those employees or their replacements by March 31, 2021.
This temporary legislative relief is very limited, especially so given the slower-than-desired-road-to-economic-recovery many businesses are experiencing. However, this is not the only way to conclude whether or not there has been a partial termination.
Each Plan’s circumstances regarding participants’ employment terminations in 2020 and 2021 needs to be evaluated, on a case-by-case basis. If there is a concern about the partial termination issue for a Plan, a game-plan for addressing the issue can be recommended by us.
ACSI (www.acsi-ny.com or email@example.com) is available to discuss the potential partial termination for your Plan.