During 2020, many employers experienced significant changes in their workforce, including temporary furloughs, workforce reductions or decreases in pay rates either temporary or permanent. For some employers, the workforce reductions were temporary and have returned to normal levels, while others may be seeing a continuing reduction.
The Internal Revenue Service (IRS) regulations include rules surrounding workforce reductions and a potential requirement to provide impacted participants with 100 percent vesting during substantial employer-initiated decreases in the workforce. These types of events often include a plant or division closing resulting from adverse economic events that may be outside the employer’s control.
The determination of whether a partial plan termination has occurred is based on facts and circumstances; however, as a general rule the IRS has said that a reduction greater than 20 percent in the number of covered participants during a plan year is considered a partial plan termination.
Recent Relief
On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA) was signed into law, including a temporary rule providing COVID-related relief from certain partial plan terminations. The Act states:
“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.”
Filing Form 5500
The annual information return Form 5500 includes participant counts at both the beginning and end of the year, as well as the number of participants who have terminated during the year that are less than 100 percent vested. The IRS uses this information to assess whether a potential for a plan termination may have occurred.
The IRS may send a questionnaire to plan sponsors requesting additional information surrounding the changes in the workforce to assess whether participants should have been 100 percent vested. These questionnaires may not be sent for several years after a Form 5500 was filed and any forfeited account balances have been used to pay plan expenses or offset other employer contributions. To avoid the need for the employer to restore forfeitures years later, we strongly recommend you review the impact on your participants as part of the completion of your 2020 Form 5500 reporting and compliance process.
Please consult with your Sikich retirement plan advisor to assist with these rules and to learn how they may impact your Plan. Also click here for the IRS’ Retirement Plan FAQ regarding Partial Plan terminations.
