As employers continue to grapple with furloughs and layoffs, one thing you may not initially think of is the impact those decisions will make on your defined contribution plans covered by ERISA. A furlough or layoff could have an impact on participant vesting. And, if you have significant staff reductions or layoffs, you may become subject to IRS partial plan termination rules.
Here are some things to consider:
Review your plan. As a plan sponsor, you need to understand how severance of employment and the calculation of vesting service provisions. It is probably a good idea to work with your legal counsel to determine if a furlough or layoff constitutes a severance or termination of employment for your plan. Two common approaches include elapsed time and number of hours to determine how employment is defined.
- Elapsed time: This is what is used by many plans. Under this definition, a break in service of less than 12 months is not considered a severance of employment and vesting would be counted throughout the layoff period.
- Number of hours: Under this definition, the plan measures vesting based upon a minimum number of hours worked in a 12-month period, meaning a participant may not earn vesting credit for time on layoff or furlough. And if they miss the minimum number of hours worked in a 12-month period, it could trigger a break in service which could impact the vesting percentage for employer contributions after the break is over.
Partial plan termination. Generally, the IRS views cases where there is a true separation from employment of 20% or more of the employees participating in the retirement plan in a plan year as a partial plan termination. In a partial termination of a plan, the benefits to the participants becoming terminated are fully vested, including company match and profit-sharing contributions.
- The first step to take here is to once again go back to your plan and clearly understand how your plan counts an employee’s service as this is one factor the IRS will take into consideration for determining if there could be a partial termination of a qualified retirement plan.
- More than likely for 2020, it will be likely that layoffs that are not intended to be permanent will not create a partial plan termination. If these layoffs extend into 2021 or a group of participants are not brought back to work, then a partial plan termination could potentially occur.
As with all things COVID-related, the guidance offered by the IRS and legislation passed is fluid and could change. If you are in a situation where you are expecting layoffs of more than 20%, you should seek guidance from your legal counsel and work with your retirement plan advisor to plan accordingly.
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