CARES Act Update for Employers: Partial Plan Termination

School of Employer Plans

A paper report with CARES Act – Coronavirus Aid, Relief, and Economic Security Act written on it, with an open ink pen lying on top – indicating Partial Plan Termination Rules were clarified by the CARES Act.

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In their latest clarification of the CARES Act, the Internal Revenue Service [IRS] provided additional guidance for retirement plans. In addition to IRS guidance, there were some miscellaneous items that employers may want to take into consideration before year end, specifically Partial Plan Termination.

What is Partial Plan Termination?

With the COVID-19 pandemic raging, many employers are reducing their workforce to account for reduced demand of their products and services. Those employers must pay special attention to the new rules issued by the IRS regarding Partial Plan Termination.

According to the IRS, Partial Plan Termination is defined by Rev. Rul. 2007-43 where they “established that a 20% or greater turnover rate in the applicable period creates a rebuttable presumption that a partial termination occurred.”

In plain English, this means that any employer that utilizes a vesting plan for their employee retirement benefits could be affected, if they reduce their workforce by 20% or more. When that happens, they would need to fully vest the impacted employees. This rule appears to be aimed at employers who might choose to terminate employees simply because they are not fully vested, so they could save costs by not paying those retirement benefits.

Many businesses have been wondering whether these rules would apply during this pandemic. Per the recent clarification by the IRS, these rules remain in effect.

How is Partial Plan Termination Determined

To determine whether a Partial Plan Termination occurred, the IRS analyzes facts and circumstances surrounding layoff activity of the organization. The analysis usually covers a period of one year or more, and it breaks down the data of laid off and furloughed employees who have not returned to work.

The non-returning employees are used as the numerator in the formula. The denominator is comprised of the number employees at the company, prior to the layoff date. This figure also includes all employees who became eligible during the applicable period.

Partial Plan Termination rules should be seriously considered by employers when planning significant workforce reductions. It is critical for business owners and human resource managers to understand how these costs will impact their business in the long run, so they can make the decisions that are best for the future of their companies.

Stay Abreast of Critical Changes to Employee Benefits by Following Meld Financial

If you have more questions about Partial Plan Termination rules or other employer retirement plan issues, don’t hesitate to reach out to our team here at Meld Financial. To stay updated on new regulations and other important Employee Benefit information, be sure to visit the Meld University School of Employer Plans, and don’t forget to follow us on LinkedIn, Twitter and Facebook.

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