What Employers Need to Know About Partial Plan Terminations

Updated May 2021

In mid-2020, the U.S. government provided relief from partial plan terminations for companies that furloughed or laid off workers as a result of the pandemic but rehired employees by December 31, 2020. Just a few days before year-end, however, Congress extended and expanded this relief an additional three months.

While the extension of the temporary relief has passed, it is still important for plan sponsors to understand the rules and potential consequences of partial plan terminations.

Before Congress provided relief because of the pandemic, a partial plan termination would have generally occurred when 20% or more of employees participating in a defined benefit or defined contribution plan were involuntarily terminated from employment.

In addition to this general rule, there are several specific aspects of partial plan terminations that employers need to understand:

  • Determinations based on “facts and circumstances”: To determine whether a partial termination has been triggered, plan sponsors are required to review the “facts and circumstances” surrounding the reductions in workforce. Different rules may apply if the terminated employees work across business lines in an entity or the terminations span more than one plan year.

  • Only involuntary terminations apply: Only employees who are terminated for involuntary reasons count toward the partial plan termination trigger. On its FAQs page, the IRS said that routine turnovers and certain spin-offs may not count toward a partial plan termination. Employers may provide evidence to the Internal Revenue Service (IRS) that the turnover rate was not the result of an employer-initiated severance.

  • Other triggers: Partial plan terminations can happen for reasons other than layoffs or furloughs, such as when plan amendments exclude employees or adversely affect vesting rights, or when reduced or eliminated future benefit accruals result in a reversion to the employer.

  • Consequences: When a partial plan termination occurs, affected employees (i.e., those who have been terminated that year) automatically become 100% vested in all employer contributions, including matching contributions. In general, a plan will remain qualified only if it makes all employees affected by a partial plan termination whole. Failure to comply with rules and requirements following a partial plan termination can have dire financial consequences for the plan sponsor, including disqualifying the entire plan, which could result in major tax liabilities and penalties.

  • Making corrections: If an error in making affected employees whole has occurred, it is possible to fix the error using the Internal Revenue Service (IRS)’s Employee Plans Compliance Resolution System (EPCRS).

  • Considerations for defined benefit plans: The Pension Benefit Guaranty Corp. (PBGC) wants to be informed of reportable events that could trigger a partial plan termination. These include when the number of active participants in a plan goes below 80% or when operations at a facility stop, reducing the number of eligible employees by 15%. The PBGC needs to be informed of these events so it can prepare for the possibility of having to take over such plans.

  • Considerations for multiemployer plans: Multiemployer plans need to be aware that partial terminations can happen when there is a partial suspension of an employer’s contributions or contributions decline by at least 70% over a three-year period. A variety of calculations are required depending on the multiemployer plan’s industry and other circumstances, but the 70% threshold is a good barometer to track. 


New law extends relief through March 31

The Consolidated Appropriations Act, 2021 says that an employer can be exempt from the partial plan termination rules if the number of active participants covered by the plan on March 31, 2021 is at least 80% of the number of active participants covered by the plan on March 13, 2020. This rule expands IRS guidance from mid-2020 that allowed employers to avoid a partial plan termination if they furloughed or laid off workers as a result of the pandemic, but rehired employees by December 31, 2020.

It is important to note that employers don’t need to rehire the specific workers who were laid off; rather, the relief is based on the total number of active participants. And “active” is an important qualifier because some plans require a waiting period for new hires before they become active participants in the plan. Furthermore, without additional guidance at this time, there are lingering questions for employers that have already fully vested participants because of a partial plan termination that may have occurred during the pandemic.


BDO Insight: Don’t Count on Further Extensions

While it is possible that the March 31, 2021 deadline may be extended, employers shouldn’t assume that this will happen. Employers that have made significant workforce reductions, whether because of the pandemic or otherwise, need to analyze their active plan participant numbers to see whether they may be below the 80% threshold. In addition, employers should understand that a partial plan termination generally would reduce forfeitures in the plan if affected participants are fully vested due to a partial plan termination. Forfeitures result from unvested balances from participants who leave the company. Many employers regularly use forfeitures to reduce plan expenses or fund employer contributions.

Your BDO representative can review your company’s unique situation to help determine whether you may be at risk for a partial plan termination and how to comply with these rules.

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