United States: Beware - COVID-19 Layoffs may trigger liability for partial plan terminations

In brief

Employers considering COVID-19-related layoffs and RIFs right now should add one more item to their checklist of considerations: the possibility of inadvertently triggering a "partial termination" of their tax-qualified retirement plan.

Where plan participant numbers decrease substantially, the plan may incur what's known as a "partial termination". This is significant because, once triggered, the IRS requires the benefits of all “affected employees” be fully vested.  Failure to provide such vesting could put the plan's  tax-qualified status at risk.


IRS presumption

Pursuant to IRS guidance, if the participant "turnover rate" is at least 20%, there is a rebuttable presumption that a partial termination of the plan has occurred.  The turnover rate is determined as follows:

Turnover rate =


Number of participating employees who had an "employer-initiated" termination during the applicable period 



Total of all participating employees at the start of applicable period + employees who became participants during the applicable period


  • In general, the "applicable period" is the plan year, but it could be longer if there are a series of related terminations.  Relevant court cases have used a facts and circumstance analysis to determine whether consecutive plan years should be considered a single "applicable period."  For example, if there is a series of layoffs related to a  downturn spanning several years. 
  • All participating employees during the applicable period are taken into account.  
  • An employee termination is “employer-initiated” even if caused by an event outside of the employer’s control (e.g., severance due to current economic conditions). 
  • Decreasing the numerator 
    • Employees whose employment terminated on account of death, disability, or retirement on or after normal retirement age are disregarded for purposes of the numerator. 
    • Employees who voluntarily severed employment are also disregarded for purposes of the numerator.  (Note: The voluntary nature of the termination should be supported through information such as personnel files, employee statements, and other corporate records).
    • Employees who are transferred outside the sponsor controlled group are disregarded for purposes of the numerator if those employees continue to be covered by a plan that is a continuation of the plan under which they were previously covered (i.e., a sale of a portion of a business where there is also a spin-off of a portion of the seller plan). 

A Facts and Circumstances Analysis

Once the turnover rate has been determined, all other facts and circumstances must be reviewed.  Facts and circumstances indicating that the turnover rate for an applicable period is routine for the employer would support a finding that there is no partial termination for that applicable period. For this purpose, information as to the turnover rate in other periods and the extent to which terminated employees were actually replaced, whether the new employees performed the same functions, had the same job classification or title, and received comparable compensation are relevant to determining whether the turnover is routine for the employer.

As noted, IRS requirements provide that upon a partial termination, the accounts of all “affected employees” must be fully vested. The IRS guidance does not specify who is included in the term “affected employees,” or how that  group should be determined.  At minimum, this is viewed as all employees with an employer-initiated termination during the applicable period.  Conservatively, some employers will include employees that had a voluntary termination during the applicable period.

For employers considering a reduction in force, conducting a partial termination analysis can avoid cumbersome and possibly costly remediation (e.g. finding former participants and making additional distributions from the plan) if a partial termination is later found to have occurred. As such, we recommend monitoring the turnover rate and including benefits counsel during the planning process.

For assistance with a partial termination analysis, contact your Baker McKenzie employment & compensation attorney.

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