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Reduction in Workforce and Partial Plan Terminations

“My client had a 35 percent reduction in workforce in January 2020. Does that automatically mean the business suffered a partial plan termination?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Massachusetts is representative of a common inquiry related to reductions in workforce.

Highlights of Discussion

Not necessarily; it all depends on the facts and circumstances, and whether those terminated employees are rehired by the end of 2020.

The IRS presumes there is a partial plan termination when an employer reduces its workforce (and plan participation) by at least 20 percent during the plan year. This presumption is rebuttable, however. The IRS makes it clear that an actual determination of a partial plan termination is based on all the facts and circumstances of a particular scenario [Treasury Regulation § 1.411(d)-2(b)]. The IRS’s Revenue Ruling 2007-43 provides further guidelines to help determine if a partial plan termination has occurred. For additional coverage, please see RLC’s related Case of the Week.

The most recent guidance on this issue comes from the IRS’s Coronavirus-related relief for retirement plans and IRAs questions and answers, Q&A 15 (added July 2020). As a result, for purposes of determining whether a partial termination of a retirement plan occurred during the 2020 plan year, the IRS will not treat plan participants who were furloughed as having an employer-initiated severance from employment during the year if the business rehires them by the end of 2020. If that is the case, then immediate vesting of employer contributions would not apply.

Determining whether a plan is partially terminated is important because the IRS requires that all participants covered under the portion of a plan that is deemed terminated become 100 percent vested in matching and other employer contributions if the contributions were subject to a vesting schedule [IRC §411(d)(3) and Treasury Regulation 1.411(d)-2]. That could be very expensive, and something to think about if rehiring is a viable option.


The determination of whether or not a partial plan termination has happened depends on the facts and circumstances that occur over (at least) a full plan year. Although not binding legal authority, the IRS’s FAQ on rehires during 2020 provides plan sponsors insight into how the IRS will view such activities this year.

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