Partial Plan Termination and Rehires

On July 30th, the Internal Revenue Service updated the retirement plan COVID Q&A on their website to clarify that an individual terminated and rehired in 2020 due to COVID is not considered to have an employer initiated severance from employment. It is unclear to me whether this guidance is only applicable for for COVID related severance and rehire in 2020, or is this the ongoing general interpretation for future years and other terminations/rehires (ie - due to sale of a business; closing of a plant; etc)?

Q15. Are employees who participated in a business’s qualified retirement plan, then laid off because of COVID-19 and rehired by the end of 2020, treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the plan occurred? (added July 30, 2020)

A15. Generally, no. Subject to the facts and circumstances of each case, participating employees generally are not treated as having an employer-initiated severance from employment for purposes of calculating the turnover rate used to help determine whether a partial termination has occurred during an applicable period, if they’re rehired by the end of that period. That means participating employees terminated due to the COVID-19 pandemic and rehired by the end of 2020 generally would not be treated as having an employer-initiated severance from employment for purposes of determining whether a partial termination of the retirement plan occurred during the 2020 plan year.

See Revenue Ruling 2007-43 for more information on partial terminations, including vesting rules, how to calculate the turnover rate for employer-initiated severances, the presumption that a turnover rate of at least 20 percent during an applicable period results in a partial termination, and how to determine the applicable period.

 https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers#:~:text=In general%2C section 2202 of,to qualified individuals%2C as well

While I don't find the referenced RR particularly illuminating, I think they are saying that if terms are rehired then they're not going to forfeit so there is no partial termination.  (It doesn't seem to contemplate that they might take their money immediately and in fact forfeit, but I don't see the need to look for trouble.)  I see it as general guidance - but don't see the relevance to sale of a business, closing of a plant...unless of course they are rehired, but those would appear to be highly unusual circumstances.  I mean if you sell a business, you're probably going to terminate a plan associated with that business and 100% vest everyone anyway.  Are you theorizing about un-selling a business?  If a business is sold in a stock sale and the plan goes with it, then I don't see terminations and rehires happening.  

I think this has always been the guidance for partial plan terminations, and the IRS is just clarifying its position related to COVID-19 layoffs.  For any of my plans that have employer-initiated terminations during the plan year who then rehire the participant(s) before the end of that same plan year, I do not count them as an employer-initiated termination because, well, they were REHIRED.  Your question did not seem to ask about distributions and any possible related forfeitures, and since Bird already provided some thoughts on that, I will not address those items.

Great point, Gruegen!

This related piece was published by a law firm just yesterday; will be in today's BenefitsLink Retirement Plans Newsletter:

"Rehiring Employees Terminated Due to COVID-19 by the End of the 2020 Plan Year May Help Avoid a Partial Plan Termination"

https://www.bsk.com/news-insights/rehiring-employees-terminated-due-to-covid-19-by-the-end-of-the-2020-plan-year-may-help-avoid-a-partial-plan-termination