The Consolidated Appropriations Act 2021 Provides COVID Relief from Partial Plan Terminations

The Consolidated Appropriations Act of 2021 (CAA), signed into law on December 27, 2020, includes a temporary rule providing COVID-related relief from certain partial plan terminations for employee benefit plans. Under this provision, a plan is not treated as having a partial plan termination during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.

Partial plan terminations typically occur when there is employer-initiated employee turnover of 20 percent or greater that is not routine, usually the result of a significant event such as a plant or division closure. However, the COVID-19 pandemic has led to an unprecedented amount of turnover and therefore plan terminations.

If the IRS determines that a partial plan termination has occurred, then as of the date of the partial plan termination, all affected employees must be fully vested in their account balance or their accrued benefits, including employer-matching contributions regardless of the plan’s vesting schedule. Affected employees in these situations include those who separated from service with the employer and stood to be affected by the termination of the plan.

Partial plan terminations can be rebutted if the employer can provide evidence of the turnover rate being routine. Companies that experienced unusually high turnover and/or significant layoffs in 2020 should consider whether they qualify for the relief provision. These considerations include:

  • Obtaining an understanding of partial plan termination rules and the relief provision;
  • Tracking and documenting employee terminations and the reason for the termination;
  • Calculating and documenting the turnover rate for 2020 to determine proximity to the 20 percent threshold; and
  • Calculating and documenting the number of active plan participants as of March 13, 2020, and March 31, 2021, to determine if the 80 percent threshold for the relief provision is met.

We’re Here to Help

Bennett Thrasher’s Employee Benefit Plan Audit practice can help you navigate the rules around partial plan terminations as well as the relief provision of the CAA. For more information on these services or employee benefit plans in general, please contact Alana Mueller or Charlsie Pritchett by calling 770.396.2200.