Qualified retirement plan rules affect COVID-19-related layoffs and rehires
- Learn more about the IRS’s recently clarified rules regarding partial termination of a qualified retirement plan.
- Find out how the IRS decides if the partial termination of a qualified plan has occurred.
- Learn more about the questions surrounding how the IRS treats partial terminations in regard to the COVID-19 crisis.
- Find out how the IRS has been able to clear up confusion surrounding this issue.
Has your company laid off employees this year because of the COVID-19 pandemic? Do you plan to rehire some of them before the end of 2020? Or maybe you already have? If so, and you offer a qualified retirement plan, listen up! Fiducial has some news for you! The IRS recently cleared up issues regarding whether partial termination of a qualified plan occurs under such conditions.
Partial plan termination
According to Internal Revenue Code Section 411(d)(3), a qualified retirement plan must provide that, upon its “partial termination,” the rights of all affected employees to benefits accrued to the date of the partial termination may not be forfeited. This applies to the extent a plan is funded on that date or to amounts credited to the account.
The IRS decides whether a partial termination of a qualified retirement plan has occurred (and the time of the termination) by looking at the facts and circumstances of each case. These include:
- The exclusion, by reason of a plan amendment or employer-initiated severance, of a group of employees previously covered by the plan, and
- Plan amendments that adversely affect the rights of employees to vest in benefits under the plan.
Your qualified retirement plan and the impacts of COVID-19
The clarification provided by the IRS comes in the form of a question and answer. The agency asks, “Are employees who participated in a business’s qualified retirement plan, then laid off because of COVID-19 and rehired by the end of 2020, treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the plan occurred?” The IRS answers:
Generally, no. Subject to the facts and circumstances of each case, participating employees generally are not treated as having an employer-initiated severance from their job for purposes of calculating the turnover rate used to help decide whether a partial termination has occurred during an applicable period, if they’re rehired by the end of that period. That means participating employees let go due to the COVID-19 pandemic and rehired by the end of 2020 generally would not receive treatment as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the qualified retirement plan occurred during the 2020 plan year.
(Emphasis added.)
Easy to overlook
The COVID-19 crisis has led many employers to temporarily reduce the size of their workforces with the hope of bringing back some workers when safe and feasible. One easy-to-overlook way this is affecting businesses is the compliance impact on employee benefits.
Need help making sense of the qualified retirement plan rules? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!
For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.
