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Partial Plan Termination Relief due to COVID-19 Expires March 31, 2021

March 01, 2021

Are you planning to rehire workers laid off due to the pandemic? Or hire new employees to restore staffing levels? You must do this by March 31, 2021 in order to avoid a partial plan termination.

Employers, you will want to read up on how the Consolidated Appropriations Act, 2021 (CAA) affects partial plan terminations of employer sponsored employee benefit plans. Due to challenges presented by the COVID-19 pandemic, many businesses, especially those in the hospitality and restaurant industry, were forced to lay off or furlough workers which potentially could require a partial plan termination. If your business is ready to rehire laid off workers, you must do so by March 31, 2021 to avoid a partial plan termination. Here are the details.

What is a partial termination?

Partial terminations generally occur in connection with a closing of a plant or division or general employee turnover due to reasons outside the employer’s control (adverse economic conditions, for example). If more than 20% of your plan participants were laid off in a particular year, your plan may have a partial termination.

Those “affected employees,” (those who lose their jobs) become fully vested in their account balance (including all employer contributions) as of the date of a full or partial plan termination, regardless of the plan’s vesting schedule.

What does it mean to be “fully vested”?

When an employee is fully vested in a retirement plan, he/she has 100% ownership of the funds in his/her account. That means the employer cannot forfeit or take back the employer contribution portion of the balance for any reason.

What difficulties does this present?

If the employees are not fully vested upon a partial plan termination, the IRS could potentially disqualify the plan and the plan’s trust may no longer be considered tax exempt.

This can represent a significant cost to employers.

What is the relief being offered?

The CAA has temporarily provided relief from the partial plan termination rules. The number of active participants covered by the plan on March 31, 2021 must be at least 80% of the number of active participants covered by the plan as of March 13, 2020 to avoid a partial plan termination and fully vesting the terminated employees. The employees who are hired through March 31, 2021 do not need to be the same employees that were employed as of March 13, 2020.

If employers are able to increase their plan participants by March 31, 2021, they can avoid the costs associated with accelerated vesting of benefits.

The relief applies for any plan year end which includes the covered period indicated above.

Need help navigating the relief? We can help. Contact us.

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