IRS Clarifies Implementation of Partial Plan Termination Relief

The most recent COVID-19 relief bill, attached to the Consolidated Appropriations Act, 2021, included provisions to help retirement plan sponsors avoid a partial plan termination.

The bill states: “A plan shall not be treated as having a partial termination (within the meaning of 411(d)(3) of the Internal Revenue Code of 1986 [IRC]) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020.”

Now, the IRS has issued guidance to clarify implementation of the partial plan termination relief. In a Q&A on its website, the agency says “a reasonable, good-faith interpretation of the term ‘active participant covered by the plan,’ applied in a consistent manner, should be used when determining the number of active participants covered by a plan on March 13, 2020, and March 31, 2021.”

It also explains that the active participants counted on March 31, 2021, include all participants who are active on that date, regardless of whether they were active on March, 13, 2020—meaning new participants are included.

The guidance further clarifies that the partial plan termination relief applies regardless of the reason for the reductions in active plan participants. The provision’s terms are not limited to reductions related to the COVID-19 national emergency.

Asked how the relief applies to a plan year if only part of the plan year falls within the period beginning on March 13, 2020, and ending on March 31, 2021, the IRS answers: “If any part of the plan year falls within the period beginning on March 13, 2020, and ending on March 31, 2021, then [the relief] applies to any partial termination determination for that entire plan year.” As an example, the IRS says if a plan has a calendar year plan year, the 80% partial termination test applies to both the January 1 to December 31, 2020, plan year and the January 1 to December 31, 2021, plan year.