Plan sponsors have a fiduciary obligation to follow the plan document. Qualified plans include in the plan document a provision upon its termination or partial plan termination that the rights of all affected parties accrued to the date of such termination or partial plan termination are nonforfeitable. If your plan experiences a partial plan termination, you are responsible for ensuring that provision is properly followed.
If a partial plan termination occurs, all “affected employees” must be fully vested in their account balance as of the date of plan termination. They must become 100% vested in all employer contributions (including matching contributions) regardless of the plan’s vesting schedule.
What is a Partial Plan Termination?
Partial plan terminations may occur:
- When there is substantial employer-initiated employee turnover, either due to a significant event, such as a plant or division closing or other events that are outside the employer's control.
- Amendments are made to the plan that adversely affects the rights of employees to vest in benefits under the plan.
- Certain factual circumstances may affect the assessment of a partial plan termination.
As a general rule, the IRS has said that a more than 20% reduction in the number of covered participants during a plan year is considered a partial plan termination.
The COVID-19 pandemic has caused many such plant or division closings.
On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA) was signed into law. For Plan Sponsors, the most important component was a temporary rule providing COVID-related relief from certain partial plan terminations.
The relief provision in the CAA is in Division EE-Taxpayer and Certainty Disaster Tax Relief Act of 2020, Title II, Section 209, and reads as follows:
"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 percent of the number of active participants covered by the plan on March 13, 2020."
Insight – Review for Partial Plan Termination
Document the processes used to evaluate the potential of a partial plan termination, the conclusions reached including whether the COVID-related relief applies, and the actions taken to appropriately address such an event.
If you have questions about a partial plan termination or how this relief might relate to your plan, please contact your representative.