The Consolidated Appropriations Act, 2021 (CAA), which was signed into law on December 27, 2020, includes a temporary rule providing COVID-related relief from certain partial plan terminations. The relief provision in the CAA is in Division EE—Taxpayer and Certainty Disaster Tax Relief Act of 2020, Title II, Section 209, and reads as follows: “A plan shall not be treated as having a partial termination (within the meaning of 411(d)(3) of the Internal Revenue Code of 1986) 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 may occur when there is substantial employer-initiated employee turnover, either due to a significant event, such as a plant or division closing, or as a result of adverse economic conditions or other events that are outside of the employer’s control. A partial plan termination may also be the result of plan amendments that adversely affect the rights of employees to vest in benefits under the plan. Certain factual circumstances may affect the assessment of a partial plan termination. The determination of whether a partial plan termination has occurred is based on facts and circumstances, but as a general rule, the IRS has said that a more than 20% reduction in the number of covered participants during a plan year is considered a partial plan termination.
Click here for the IRS’s Retirement Plan FAQs regarding Partial Plan Termination.