The Internal Revenue Service (IRS) released some new guidance on the temporary partial plan termination rules thanks to COVID under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act).
Usually, there is a presumption that a partial plan termination has taken place within a qualified plan when an employer’s turnover rate is at least 20 percent during the plan year. Partial plan termination requires those participants covered under the plan to be fully vested in employer contributions.
The Act stated that a partial plan termination doesn’t occur “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.” The guidance gives some relief to employers that eventually re-hire employees as they recover from COVID restrictions.
The new guidance addresses the following points.
- “Active participant covered by the plan” is determined based upon a reasonable, good-faith interpretation of the term. When only part of the plan year falls between March 13, 2020, and March 31, 2021, the Act “applies to any partial termination determination for that entire plan year.” The IRS provides this example: “If a plan has a calendar year plan year, the 80% partial termination in [the Act] applies to both the January 1 to December 31, 2020 plan year and the January 1 to December 31, 2021 plan year because both plan years include a part of the statutory determination period of March 13, 2020, to March 31, 2021.”
- The Act doesn’t require the same individuals to be covered on the beginning and end dates, only that the number counted on March 31, 2021, includes all individuals who are active participants covered by the plan on said date. So that means that the employer has to hire employees, not the same employees who were terminated.
- The reduction in the number of active participants isn’t solely limited to reductions related to the COVID-19 pandemic, it could be for a variety of reasons.
