How Could Employee Layoffs Due to COVID-19 Affect Your Retirement Plan?

Employers are facing many challenges due to the recent spread of COVID-19.  If you have had to reduce your workforce as a result of the financial impact of the virus, there may be repercussions that affect your retirement plan.  Your plan may have experienced a partial plan termination as a result of one downsizing or a chain of dismissals.

The IRS considers a partial termination to have occurred when an employer-initiated action results in a significant decrease in plan participation. Generally, the IRS presumes a partial termination has occurred when an employer experiences a workforce reduction of 20%.

The reduction in workforce rate is determined by dividing the number of participating employees who had an employer-initiated severance during the plan year by the sum of the number of participating employees at the start of the plan year and the number of employees who became participants during the plan year.

If a plan experiences a partial termination, all affected participants must be fully vested in their account balance as of the date of partial termination. “Affected” participants are those employees actually terminated by the employer. Typically, employer contributions are subject to a graduated vesting schedule. Upon a partial termination, however, all employer contributions and other employer contributions must be fully vested for all affected participants, regardless of the vesting schedule in the plan document.

These are trying times without the added burden of determining if a partial termination has occurred. If your business has experienced a significant reduction in workforce, please contact us to discuss the possible ramifications to your retirement plan.