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by David A. Allen, J.D.

As I mentioned in my previous blog post, we are witnessing the devastating impact of the COVID-19 crisis on the global economy and drastically decreased revenues of businesses worldwide. As a result, employers are dealing with decisions whether to reduce their workforce either temporarily or permanently. Depending on the type of employee reduction and numbers of jobs involved, some employers could create a partial plan termination for their retirement plans.


The IRS generally deems a plan to have experienced a partial plan termination if a significant reduction in participation in the plan occurs for reasons other than routine turnover. A “significant reduction” is a facts and circumstances determination in which the IRS presumes that if a 20% or greater reduction in the employer’s workforce has occurred over the course of a plan year, then the plan has experienced a partial plan termination (or longer period if the series of terminations are related). Based upon the industry, some employers may be able to establish a higher threshold for a routine turnover. However, once a partial plan termination has been determined, all participants who terminated during the applicable period, whether it be involuntarily or voluntarily, become 100% vested in employer plan contributions. Given that this is a facts and circumstances determination, not all cases will be clear.


Due to the pandemic, many employers may have initiated layoffs and/or temporary job reductions of 20% or more. Some questions to resolve in order to determine whether workforce reductions meet the 20% headcount threshold are:

1. Was turnover rate routine?*

Factors to consider include:

  • What was the turnover rate in previous periods and which terminated employees were replaced? 
  • Are new employees who were hired to replace terminated ones performing the same functions?
  • Do new employees have the same job classification or title as those they replaced?
  • Are compensations for new hires comparable to those terminated?


2. Were job reductions furloughs or layoffs?

Generally, a furlough is a temporary leave or reduction in days worked and not intended to be a permanent separation of service. Furloughs do not count towards a partial plan termination. However, an indefinite layoff is most likely a separation of service, whereas a short-term layoff would depend on relevant facts and circumstances. Where the employment status is unclear, the employer should seek guidance from its legal counsel.


3. Would employees who separated from service and are rehired need to be included in headcount?

Unfortunately, the answer is not in the regulatory guidance. However, if an employer rehires separated individuals by the end of the plan year, an employer could make a valid case to exclude them from headcount.


4. Did any employees voluntarily leave employment?

Voluntary terminations are usually not included in headcount to determine whether a partial termination has occurred. They do count when determining who must vest 100% in employer contributions after a partial termination. In some instances, courts have ruled that employees who voluntarily left their employment were involuntarily terminated by their employers under the theory of constructive discharge.*


An employer who partially terminates a plan must determine which participants require 100% vesting due to the partial termination. Additionally, employers who think they may have experienced a partial plan termination this year should consider one of the following options:

  • Fully vest participants who terminate during this year.
  • Delay using forfeitures from participants who terminate this year until it has been determined whether a partial plan termination occurred. If other participants have received those forfeitures and the plan cannot return the forfeitures to terminated participants, then the employer will be responsible for making affected participants whole.*


If your organization is struggling with this partial plan termination issue as part of the COVID-19 crisis, please contact Midland Retirement Plan Services or reach out to me, David Allen, at 815-231-2823 or for assistance today.

*Reference Internal Revenue Service (IRS) website link for ‘Retirement Plan FAQs regarding Partial Plan Termination’ here:

Midland Wealth Management does not provide tax or legal advice. Please consult your tax or legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.