IRS Provides Q&A Guidance on Temporary Relief From Partial Terminations

The IRS has updated its Q&As regarding coronavirus-related relief for retirement plans by adding a new section about the partial termination relief provided by the Consolidated Appropriations Act, 2021 (CAA, 2021). Under that relief, a plan is not treated as having a partial termination—and thus is not required to fully vest accrued benefits—during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021 (the “testing period”), 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 (see our Checkpoint article). (Qualified plans that already fully vest all participant benefits, such as 401(k) plans with no profit-sharing or stock bonus feature, are unaffected.) After summarizing the statutory provision, the guidance clarifies four key points:

• Affected Reductions. Workforce reductions covered by the relief are not limited to reductions related to the COVID-19 national emergency, even though the first day of the testing period—March 13, 2020—was the date the national emergency was declared.
• Active Participants. The guidance does not specify who must be considered an “active participant covered by the plan,” but it states that plan sponsors should use a reasonable, good faith interpretation of that phrase, and apply their interpretation consistently.
• Which Participants? To count toward the 80% test, covered active participants on March 31, 2021, do not have to be the same individuals as the ones who were employed on March 13, 2020 (i.e., new hires count).
• Plan Years Affected. The relief applies to plan years, any part of which falls in the testing period. Thus, if the 80% standard is met by a calendar-year plan, the relief will apply to the entire 2020 calendar year and the entire 2021 calendar year.

EBIA Comment: The partial termination relief addressed in these Q&As appears in the portion of the CAA, 2021 known as the “Taxpayer Certainty and Disaster Tax Relief Act of 2020.” That context, and the fact that the relief uses the first day of the presidentially declared COVID-19 emergency as the first day of the testing period, might have led some employers and advisors to conclude that the relief would not apply to workforce reductions that were not demonstrably COVID-19-related. This guidance eliminates that obstacle and acknowledges the breadth of the statutory provision, which apparently benefits not only employers who experienced (and sufficiently reversed) workforce reductions during the testing period, but also employers whose reductions occur after the testing period’s end if the reductions occur during the plan year that includes March 31, 2021, and the 80% test was met on that date. For more information, see EBIA’s 401(k) Plans manual at Sections XI.M (“Immediate Vesting Upon Partial Plan Termination”) and XXXVIII.H (“Special Issues: Mergers and Acquisitions: Transaction-Related Issues to Consider”).

Contributing Editors: EBIA Staff.