No one denies that employers confronted a plethora of challenges in 2020, and many had to make difficult decisions to reduce their workforces due to the pandemic. Such reductions in force can implicate a number of business considerations and labor laws, but for employers that sponsor qualified retirement plans, these employment decisions can inadvertently implicate the partial plan termination rules under the Internal Revenue Code. In the event of a partial plan termination, affected participants (which under current guidance includes those who have voluntarily terminated employment) must become immediately 100% vested in their benefits under the retirement plan.
The determination of whether a partial plan termination has occurred is based on the surrounding facts and circumstances. However, under guidance previously issued by the Internal Revenue Service, there is a rebuttable presumption that a partial plan termination has occurred if the percentage of participants decreased by at least 20%. When determining whether that threshold percentage has been met, only employer-initiated severances, such as reductions in force and plant closures, are taken into account.
This determination is generally made with respect to each plan year (i.e. as of December 31st for a plan on a calendar year). However, the applicable measurement period may be extended beyond the initial plan year where the same event that resulted in the decrease in participation in the initial plan year continues to exist in the subsequent period.
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