New COVID-19 Legislation: Relief for Partial Plan Termination

Recent legislation was passed to help companies that had to make significant layoffs during the pandemic. Those large layoffs affect group plans for 401(k)s and health care via partial plan termination. Fortunately, new legislation provides relief for companies in that situation. 

 

What Qualifies As Partial Plan Termination? How Does It Work?

Before getting into the relief details, you need to understand what exactly “partial plan termination” means. If the number of participants covered by a plan drops by 20% or more within a plan year, this falls under partial plan termination. When this happens, the people who lost their jobs become 100% vested. In other words, they have full ownership of the balance in the account or plan. In most cases, partial plan termination also requires the terminated employees to withdraw all of the funds in the plan which might lead to tax implications.

 

The Consolidated Appropriations Act

 

The Consolidated Appropriations Act, signed into law on December 27, 2020, prevents some partial plan terminations. It is designed to help companies and employees when employers need to temporarily lay off their staff but have plans to rehire them after the COVID-19 economic crisis is over. 

The new legislation allows for this by adjusting the dates that will be considered for partial plan termination. Thanks to the new law, as long as the number of active participants on March 31, 2021 is 80% or more of the number from March 13, 2020, there is no partial plan termination. March 13, 2020 was the chosen date because this was when the government declared a national emergency. 

 

How the New Legislation Helps People and Companies

 

The new legislation is the result of the work of advocates like the American Retirement Association. They expressed concerns that the current economic disruptions, although temporary, could mean that retirement savings would be permanently displaced. They were also concerned that plans could be terminated. 

An extra benefit for the employer is that they don’t have to rehire the same people they laid off to qualify. The legislation focuses on the active participants in the plan, not the names of those people.