COVID-19 layoffs can cause partial retirement plan termination

The COVID-19 pandemic has led to “shelter-at-home” proclamations from state and local governments, causing many nonessential businesses to shut down temporarily. Employers have handled the crisis in varying ways, some by temporarily paying employees to stay home, others by laying off or furloughing workers. In such instances, employers need to be aware of the qualified retirement plan partial termination rules, which require immediate 100% vesting of accounts if a partial plan termination is deemed to have occurred.

Background

Qualified retirement plans meet IRS requirements and offer certain tax benefits. Examples include 401(k), 403(b), and profit-sharing plans. Stocks, mutual funds, real estate, and money market funds are the types of investments sometimes held in the plans.

Employee contributions to an employer’s qualified retirement plan are fully vested when contributed, which means employees will be entitled to a distribution of all their contributions plus earnings when they are eligible for and elect a distribution from the plan.

Employer contributions to a qualified retirement plan can be fully vested when contributed, but many times they’re subject to a vesting schedule that requires employees to complete a certain number of years of service before being fully vested.