While no employer wants to lay off employees, it is sometimes a fact of corporate life. Due to a downturn in the economy, lack of sales or other external events that can affect an employer’s business, an employer must sometimes make the undesirable decision to let some employees go. Employee terminations affect many aspects of the company, and one that is often overlooked is the retirement plan. When an employer lays off or terminates a large percentage of their employee population, this is referred to, for retirement plan purposes, as a partial plan termination.
The IRS generally defines a partial plan termination as a reduction of 20% of the employer’s employee population, not taking into account employees’ voluntary terminations, although facts and circumstances are taken into consideration. Generally, a 10% or lower reduction in staff does not constitute a partial plan termination, while any percentage between 5% and 20% should be reviewed based on the employer’s facts and circumstances. While the event leading to a partial plan termination oftentimes happens on a single day, it is possible that a partial plan termination will be deemed to have occurred, based on staff reductions, over the course of the plan year, or possibly over multiple plan years.
As the determination of whether a partial plan termination has occurred can be challenging, it is generally recommended that the Plan Administrator reach out to ERISA counsel, Third Party Administrator (TPA) or consultant to assist with the determination process. There are many factors that need to be considered, including but not limited to: how many participants were in the plan before the layoffs/terminations occurred; what was the reason for the layoffs/terminations; were only participants in a certain location or department affected; how many participants terminated prior to the layoff/termination event.
When a partial plan termination has been determined to occur, affected participants’ retirement plan account balances must be made 100% vested, if they are not already fully vested. Participants who terminated prior to the termination event date may also need to be included in the 100% vesting, depending on the facts and circumstances surrounding their employment termination (this is an often overlooked detail of a partial plan termination).If terminated participants are deemed to be included with the partial plan termination, but have already been paid out, their forfeitures must be reinstated and paid, possibly including earnings on the forfeited amounts.
For employers who many have incurred, or believe to have incurred a partial plan termination as a result of the COVID-19 pandemic, the IRS has provided a ‘temporary’ rule, the Consolidated Appropriations Act of 2021, to help prevent a partial termination of an employer’s plan. Under the temporary rule, for any plan year during the period March 13, 2020 through March 31, 2021, a retirement plan will not be deemed to have had a partial plan termination if the number of active participants on March 31, 2021 is at least 80% of the number of active participants on March 13, 2020.The key term here is ‘active participants’. While the regulation states that the participants as of March 31, 2021 are not required to be the same participants in the plan as of March 13, 2020, there must still be at least 80% as many (for example, if there were 100 active participants as of March 13, 2020, there must be at least 80 active participants as of March 31, 2021) to avoid a partial plan termination. Depending on the plan’s eligibility requirements, this could pose some challenges for the plan sponsor if the same employees are not rehired, or if the plan’s eligibility requirements are such that the new hires would not be eligible by March 31, 2021.
While the determination of a partial plan termination may seem to be straight forward, there are a number factors that need to be taken into consideration. A thoughtful review of all circumstances surrounding the termination event(s) may go a long way to avoid a partial plan termination.
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CBIZ Retirement Plan Services is a trade name under which certain subsidiaries of CBIZ, Inc. (NYSE Listed: CBZ) market investment advisory, investment management, third party administration, actuarial and other retirement plan services. Investment advisory and investment management services offered through CBIZ Investment Advisory Services, LLC, Registered Investment Adviser. Investments, investment advisory and investment management services may also be offered through CBIZ Financial Solutions, Inc., Member FINRA, SIPC and Registered Investment Adviser, dba CBIZ Retirement Plan Advisory Services. Third party administration, actuarial and other consulting services offered through CBIZ Benefits & Insurance Services, Inc.