COVID-19 Bill Extends Grace Period for Partial Plan Terminations

The recent COVID-19 relief bill attached to the Consolidated Appropriations Act allows certain retirement plan sponsors who laid off or furloughed employees due to the pandemic to avoid a partial plan termination.

The new law states: “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% of the number of active participants covered by the plan on March 13, 2020.” That means companies have until March 31, 2021, to rehire enough laid-off or furloughed employees to avoid a partial plan termination.

A partial termination of an ESOP or other qualified plan occurs when 20% or more of the workforce is terminated or otherwise loses its rights to benefits under the plan, such as the cessation of contributions or the tightening of vesting, during the plan year or other applicable period (see IRS Revenue Ruling 2007-43). Voluntary employee turnover does not count, but layoffs or changes in coverage rules, for instance, do. Employees no longer covered by the plan must be 100% vested under existing partial termination requirements.