As businesses face temporary closure due to the coronavirus (COVID-19), some are laying off employees due to the decrease in revenue. Some of these layoffs may be temporary, but others will be permanent based on how quickly businesses recover after re-opening. Employers should be aware that if 20% or more of their workforce is laid off, the retirement plan may experience a partial termination and affected participants (those laid off) must be made 100% vested in their employer contribution accounts.
The IRS provides guidance on partial terminations in Revenue Ruling 2007-43. Determining whether a partial termination has occurred is based on facts and circumstances. There is a presumption of a partial termination where the turnover rate is at least 20%. However, Revenue Ruling 2007-43 does not address temporary layoffs. In light of state governments requiring non-essential businesses to temporarily shut down, if employees are rehired after 2 – 8 weeks, it is unclear whether a partial termination has really occurred under a Revenue Ruling 2007-43 facts and circumstance analysis (including an analysis of the extent to which affected employees have had a “severance from employment”).
When employees are laid off, they may usually take a distribution from their retirement accounts. For those participants who are not already 100% vested, their non-vested account balances are forfeited when they take distributions. Eventually, employers will need to determine whether a partial termination has occurred. If the answer is yes, they will need to instruct their retirement provider to 100% vest the account balances of the laid off employees.
Usually, the determination of a partial termination is made on a plan year basis, but a partial termination could overlap more than one plan year, depending upon the circumstances. For COVID-19, an employer will generally need to account for all affected participants laid off due to COVID-19 during the current plan year to make this determination. If an employer waits to make the determination until the end of the plan year and it is determined that a partial termination has occurred, the employer will need to reinstate the forfeitures of affected participants who were not fully vested when they took a distribution of their accounts earlier in the plan year. If the forfeitures were previously used to reduce plan administrative expenses or employer contributions, employers will need to deposit their own employer funds into the retirement plan in order to reinstate the forfeitures. However, an employer could choose to delay using the forfeitures to reduce plan administrative expenses or employer contributions until the determination of whether a partial termination has occurred is made, and use those forfeitures to reinstate participants if a partial termination has occurred.
TRI-AD is not sure if there will be guidance on this matter from the IRS or legislation passed for partial termination relief for COVID-19 related layoffs. Employers should seek guidance from their ERISA attorneys on this matter as soon as they expect layoffs of 20% or more of their workforce and instruct their retirement providers whether affected participants should be fully vested.
If you have any questions, please contact your Client Service Manager.