Apr 2, 2020

Reductions in Force? Beware of Partial Termination

Retirement Plan

Sponsors of qualified retirement plans that are experiencing layoffs, furloughs or other reductions in employee population as a result of the COVID-19 crisis may trigger a partial plan termination if the employment of a significant percentage of plan participants is terminated.  Plan sponsors may want to establish a procedure to carefully monitor this potentiality.

If employer-initiated terminations during a plan year affect 20% or more of the total plan participants, a partial termination is likely to occur (based on the IRS position that a 20% reduction in participants creates a rebuttable presumption of a partial termination).  Participants who leave due to death, disability or truly voluntary termination are not counted, but anyone who voluntarily terminates under a reduction in force program would be counted toward the 20% threshold.  In addition, if there are a series of reductions in force, all of the reductions in the series would be counted together, even if they span multiple plan years.

Note that terminations of employment should be distinguished from short-term temporary layoffs or furloughs, in which the affected individuals are considered employees during what, in effect, is considered an unpaid leave of absence.  As long as the employees on layoff and furlough are reasonably considered employees, they will not be counted as terminated for purposes of the 20%.  However, if employees remain on furlough for an extended period of time, plan sponsors should evaluate at what point the employees should be considered as terminated for purposes of applying the partial termination rules.

Once a partial termination has occurred, all employees who terminated employment during the year must become fully vested in their qualified retirement plan benefits to the extent funded.

If you need assistance with determining whether a partial termination has occurred or have questions regarding the impact of a partial termination, please contact your SGR Employee Benefits and Executive Compensation Team.

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