The Consolidated Appropriations Act, 2021, enacted on December 27, 2020 (the CAA), includes limited relief pertaining to the partial termination of a qualified retirement plan that may have been inadvertently triggered by employer-initiated severances during the COVID-19 pandemic. Generally, as discussed further in our May 2020 post, the determination as to whether a partial plan termination has occurred depends on the facts and circumstances; however, there is a rebuttable presumption of a partial plan termination if, during the applicable period, the employee turnover rate is at least 20 percent. The employee turnover rate is the number of participating employees who had an employer-initiated severance divided by the total number of participating employees. A partial plan termination triggers 100% vesting for affected participants.

Under the CAA, a qualified retirement plan will not be treated as having a partial termination during any plan year that 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.

For example, assume that the number of active participants covered by a calendar year plan on March 13, 2020 is 1,500. If the number of active participants covered by the plan is at least 1,200 on March 31, 2021 (80% of 1,500), then under the CAA, there would be no partial plan termination for the 2020 or 2021 plan years. Note that the active participants counted on March 31, 2021 do not have to be the same individuals who were active participants on March 13, 2020.

However, there are unanswered questions, and IRS guidance on application of this partial plan termination relief would be helpful. For example, if the active participant threshold is met on March 31, 2021, but the employer terminates at least 20% of its workforce later in 2021, is a partial plan termination triggered or does the relief apply? What options, if any, are available to a plan sponsor of a plan determined to be partially terminated that took action to vest affected participants prior to the issuance of this relief?

Please note that the CAA partial plan termination relief is in addition to the previously issued IRS guidance, which provided that employees terminated due to the COVID-19 pandemic who were rehired by the end of 2020 generally would not be treated as having an employer-initiated severance for purposes of determining whether a partial plan termination occurred during the 2020 plan year, as discussed in our September 2020 post.

The rules regarding partial plan terminations are complex and include many nuances and exceptions.