COVID-19 Impact on Retirement Plans

Covid-19 Business Impact on Retirement Plans

Last updated on October 19th, 2020

Businesses that have survived the initial economic shockwave caused by the COVID-19 pandemic have a lot to be proud of.

However, with the unpredictability of the fall season looming, it’s important to understand how the decisions you make today will impact your business tomorrow.

We previously communicated to our clients and friends the provisions of The CARES Act which was passed back in March in response to the COVID-19 pandemic. The CARES Act allowed sponsors of retirement plans to amend their plans to permit coronavirus-related distributions (CRD) for participants directly impacted financially. This included plan withdrawals, changes in loan limits, waiver of RMD requirements, and elimination of the 10% excise tax for distributions made to participants prior to age 59 ½. Please remember that plan documents, company policies and handbooks may need to be revised if you adopted these changes.

At this time we want to highlight the provisions within the Internal Revenue Code relating to partial termination which can be triggered by COVID-19 related location closures or employee terminations. If you have, or plan to lay off employees, you need to be acutely aware of the qualified retirement plan partial termination rules. Before you make a major business decision that could have a ripple effect, our team at RBT suggests that you reach out to your team of financial experts to get advice.  Remember, it’s always better to be proactive than reactive.

A retirement plan can suffer a partial termination if a substantial portion (usually 20% or more) of plan participants are terminated, or if a defined benefit plan stops or reduces future benefit accruals. If a partial termination occurs, participants must be immediately 100% vested in all accrued benefits. This means that employer contributions, including matching contributions and profit sharing contributions must become fully vested regardless of the vesting schedule in the plan document.  There may be other ramifications for defined benefit plans and in particular if you participate in a multi-employer defined benefit plan.

The IRS has prescribed a “turnover rate” formula to determine whether the reduction is significant. When calculating turnover to determine if a partial plan termination has been triggered, make sure you are using the proper calculation because the IRS is referring to participant turnover, not employee turnover.

Here’s an example to determine if a partial plan termination has been triggered:

Plan A has 300 participants at the beginning of the plan year.  Due to layoffs, 80 participants are terminated from employment during the year.  An additional 20 employees become eligible to participate during the plan year.  The turnover rate is 80 ÷ 320 or 25%.

In contrast, if we were to calculate simple employee turnover, you would use this formula:

Turnover rate = # of separations ÷ average # of employees.

The number of participants in a retirement plan is not always the same as the number of employees, so the turnover rates will not necessarily be the same.

RBT recommends that you to contact your third party administrator for guidance.  If your plan is chosen for audit, and it is determined that you did not comply with the regulations, the plan may lose its qualified status  which could result in the loss of the tax deduction that was taken resulting in significant tax consequences, penalties, and fines.  RBT is here to assist our clients at all times, but in particular during uncertain times, in a thoughtful, professional, and prompt manner.

In a recent Frequently Asked Question (FAQ), the IRS clarified some information that can be challenging to understand.  For more information, see

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