Pension & Benefits News IRS adds Q&As on coronavirus-related relief concerning partial retirement plan terminations
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Monday, May 17, 2021

IRS adds Q&As on coronavirus-related relief concerning partial retirement plan terminations

By Pension and Benefits Editorial Staff

The IRS has updated questions and answers (Q&As) on coronavirus-related relief for retirement plans. When originally released, the Q&As covered issues related to Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, P.L. 116-136), which provided for special distribution options and rollover rules for retirement plans and IRAs and expanded permissible loans from certain retirement plans. The update provides added Q&As that concern the partial termination of a qualified retirement plan under Section 209 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE, Title II, Consolidated Appropriations Act, 2021 (P.L. 116-260)).

Background. Plan participants are entitled to full vesting on the termination and partial termination of the plan. However, Code Sec. 411(d)(3) does not define partial termination. Whether or not a partial termination occurs is, under the governing regulations, to be determined on the basis of all of the facts and circumstances of a particular case.

A partial termination of plan has been found to occur if a “significant percentage” of employees is excluded from participation in the plan either by reason of plan amendment or by discharge from employment (i.e., “vertical plan termination”). Significant percentages viewed as triggering partial plan terminations have varied from 20 percent to 80 percent. However, the IRS typically views a partial plan termination as occurring if more than 20 percent of total plan participants have been laid off in a year.

Q&As. The Consolidated Appropriations Act temporarily restricts application of the partial plan termination rules. Specifically, under the temporary relief, a plan will not be treated as experiencing a partial termination under Code Sec. 411(d)(3) during any plan year which includes the period beginning March 13, 2020 and ending 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.

In determining who is “active participant covered by the plan” for purposes of Section 209 of the Act, the IRS states a reasonable, good-faith interpretation of the term “active participant covered by the plan,” applied in a consistent manner, should be used when determining the number of active participants covered by a plan on March 13, 2020, and March 31, 2021.

The IRS clarifies that, if any part of the plan year falls within the period beginning on March 13, 2020, and ending on March 31, 2021, then Section 209 of the Act applies to any partial termination determination for that entire plan year. The IRS provides an example—if a plan has a calendar-year plan year, the 80-percent partial termination test in Section 209 of the Act applies to both the January 1 to December 31, 2020 plan year and the January 1 to December 31, 2021 plan year, because both plan years include a part of the statutory determination period of March 13, 2020 to March 31, 2021.

The IRS answered no to the question of whether the 80-percent test is applied by identifying the pool of active participants covered by a plan on March 31, 2021, and determining whether at least 80 percent of those same individuals were active participants covered by the plan on March 13, 2020. Section 209 of the Relief Act is applied by counting the number of active participants covered by a plan on each of those two dates. The number of active participants covered by a plan who are counted on March 31, 2021, includes all individuals who are active participants covered by the plan on that date, regardless of whether those same individuals were active participants covered by the plan on March 13, 2020, the IRS explains.

According to the IRS, Section 209 of the Act does not apply solely to reductions in the number of active participants covered by a plan that are related to the COVID-19 national emergency. Although the first day of the statutory determination period - March 13, 2020 - is the date the COVID-19 national emergency was declared, the Section’s terms are not limited to reductions related to the COVID-19 national emergency, the IRS says.

Source: Updated IRS coronavirus-related relief for retirement plans and IRAs questions and answers.

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