Employer Workforce Reduction Consideration – Employee Benefit Plans

Unfortunately, the COVID-19 pandemic has required many organizations to reduce their workforce through a combination of layoffs, furloughs, and other terminations.  Employers should be aware that workforce reductions may have consequences on the vesting provisions of employer sponsored qualified retirement plans (e.g., a defined contribution plan).

While the rules are complex, in general the IRS deems a “partial plan termination” to have occurred when reductions in the workforce (i.e. a non-routine turnover) exceed 20% or more qualifying plan participants during a reporting period.  Under this scenario, all affected employees of a partial plan termination become 100% vested in employer contributions held in their accounts. Routine turnover (e.g. seasonal turnover that is consistent with prior years) and employees that voluntarily quit do not count in the 20% threshold determination.

The IRS has recently provided guidance that employees who were terminated, laid off, or furloughed due to COVID-19 who are rehired by December 31, 2020 will not need to be counted as a terminated employee for the threshold calculation.

Please call your MSL representative if you would like to discuss this matter.