Legislation Update: IRS Clarifies Partial Plan Termination Relief Under CAA
JULY 6, 2021
Retirement plans and plan participants have seen an increase in partial plan terminations as businesses face the economic challenges of COVID-19, which has resulted in location closings, mergers, acquisitions, spinoffs, and layoffs. If a retirement plan has a vesting schedule and is subject to ERISA, these types of corporate activities can significantly affect the plan and plan participants.
In February’s USI Executive Series, we discussed partial plan termination relief provided under the Consolidated Appropriations Act (CAA), 2021, in the context of the COVID-19 emergency in the U.S. The CAA includes several COVID-19-related provisions that affect retirement plans, such as temporary relief from the requirement that terminated plan participants be fully vested under the partial plan termination rules during plan years that began in or included the period of March 13, 2020, through March 31, 2021.
To help retirement plans understand the partial plan termination relief provided under the CAA, the IRS issued supplemental guidance on April 27, 2021, in the form of five frequently asked questions (FAQs) that include the following key points:
- A plan will not be treated as experiencing a partial plan termination during any plan year that includes the period of March 13, 2020, through March 31, 2021 — if the number of active participants covered under the plan on March 31, 2021, is at least 80% of the number of active participants covered under the plan on March 13, 2020.
- An employer must apply a reasonable, good-faith interpretation of who is defined as an “active participant covered by the plan” on a consistent basis.
- If any part of a plan year falls within the period from March 13, 2020, to March 31, 2021, the CAA relief applies to any partial plan termination determination for that entire plan year. For example, if a plan has a calendar year plan year, the 80% partial termination test relief applies both to 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 of March 13, 2020, to March 31, 2021.
- The number of active participants counted on March 31, 2021, need not be the same individuals included in the 80% of active participants counted on March 13, 2020.
- CAA relief is not limited to employee reductions that resulted from the COVID-19 national emergency, even though the first date of the relief period, March 13, 2020, was the initial date that the COVID-19 national emergency was declared.