The recently passed COVID-19 Relief Legislation Act presents some significant changes that affect employees and employers on several levels. One of the most important elements of the legislation revolves around the temporary rule preventing partial plan termination. Read on to learn about what it means for businesses and their plan sponsor clients.
What Is Partial Plan Termination?
Partial plan termination is a significant plan event that can impact your plan status with the Pension Benefit Guaranty Corporation (PBGC) or the IRS. The general rule indicates that a partial plan termination may occur when an organization with a retirement plan for employees lays off more than 20% of the total plan participants in a plan year. In partial plan termination, the affected employees who lost their employment are to be immediately vested in their accounts.
Changes: Relief for Partial Plan Termination & How it Affects You?
In the wake of the global pandemic, businesses worldwide suffered significant financial losses, leading to the need for a temporary rule preventing certain partial plan terminations. Former President, Donald Trump signed the Act into Law on December 27, 2020.
Concerned about transitory economic disruptions leading to perpetual displacement or loss of retirement funds, the American Retirement Association strongly advocated the inclusion of the temporary rule in the 5,500 pages of the Legislative Relief Act. It reads:
“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 plans on March 31, 2021, is at least 80 percent of the number of active participants covered by the plan on March 31, 2020.”
What Does It Mean for You?
The legislation acknowledges that an employer might need to lay off more than 20% of their staff for a brief period during the current economic turbulence. However, it also acknowledges that the employer plans on rehiring that staff once the crisis has passed.
With these amendments, a partial plan termination will not occur if the active participant count on March 31, 2021, is at least 80% of the active participant count marked on the day that the national emergency was declared on March 13, 2020.
What Else Should You Know?
Here are some other essential pointers you should know:
- The relief is not restricted to calendar year plans only. It is applicable to any plan year that includes the covered period.
- The employer is not restricted to hiring the same employees that were laid off. The occurrence of the partial plan termination is determined by the total number of employees, not individual employees. However, keep in mind that the terms of the plan matter.
- Considering the continued economic uncertainty, it is possible that the occurrence of partial plan termination is determined and is later found to be inapplicable under the terms of the relief.
The Bottom Line
There is no denying that the implementation of relief for partial plan termination can present challenges. However, as the Department of the Treasury and IRS continue to streamline the process, the temporary relief is likely to produce lasting positive effects for plan sponsors.