Employers that provide a qualified requirement plan for their employees should be aware of the rules governing “partial terminations” if they are contemplating the termination or furloughing of employees in the present COVID-19 environment.
A partial termination of a plan may occur if a significant number of employees lose their right to vest in their plan benefits as a result of a significant event. While the determination of whether a partial termination has occurred is based on the attendant facts and circumstances, the IRS and the courts have used a 20% reduction in participation as a benchmark for this purpose. If your company’s plan provides for employer contributions (
e.g.
, matching or profit-sharing contributions) that are subject to a vesting schedule, participants who are affected by a partial termination of the plan must become 100% vested in their plan accounts.
If you are considering laying off or furloughing a significant number of employees (or have already done so), there are strategies that can be employed to avoid causing a partial termination of the plan in which the affected employees participate.
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If you have questions or would like additional information on this topic, please contact EGS’s Employee Benefits Partner Peter B. Cohen at
pcohen@egsllp.com
or the primary EGS attorney with whom you work.
