The economic uncertainty of the COVID-19 pandemic has forced many employers to furlough or layoff a significant percentage of their workforce. Among the issues an employer should consider in a furlough or layoff context is whether its workforce reductions may have inadvertently caused a “partial termination” of its qualified retirement plan, triggering a requirement that all affected participants become 100% vested and, depending on when the partial termination is identified, require additional funding to restore “forfeited” accounts. Under IRS guidance, a partial plan termination occurs if 20% or more of the total plan participants experience an employer-initiated severance from employment in a plan year. Until recently, it was uncertain how employees who are rehired during a plan year would impact the partial termination calculation. The IRS recently updated its Q&As to clarify that plan participants who were laid off because of COVID-19 and rehired by the end of 2020 are not treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the plan occurred during the 2020 plan year.
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