How Businesses Can Navigate Partial 401(k) Plan Terminations | Lord Abbett
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Retirement Perspectives

Plan sponsors can rejoice that the year-end COVID-19 Bill included relief for partial retirement plan terminations

Read time: 2 minutes

At year-end Congress passed a $2.3 trillion spending bill known as the Consolidated Appropriations Act (CAA), 2021. This massive piece of legislation included numerous provisions related to retirement plans. The most significant provision is a temporary rule preventing “partial retirement plan termination”.


Good news for plan sponsors:

If a business expirienced a significant workforce reduction in the past year due to the pandemic and is bringing employees back, it may be able to obtain plan relief if certain conditions are met.


Relief for partial plan terminations

Terminating a qualified retirement plan (i.e., a 401(k)) generally happens when a company’s finances are unduly strained and the cost of maintaining its retirement plan becomes burdensome. The economic pressures of the COVID-19 pandemic have forced small business owners to take actions such as employee furloughs and/or reducing headcount to reduce costs. Yet these maneuvers could unknowingly lead to an employer-initiated partial plan termination, which generally occurs when there is a reduction of more than 20% of the workforce. While the ultimate determination whether a partial plan termination has occurred is based on facts and circumstances, generally the IRS ruled in Revenue Ruling 2007-43 that more than a 20% decrease in the number of covered participants during a plan year is classified as a partial plan termination. Routine turnover during the year generally does not fall into this category.

How it works

The legislation acknowledges that a business may need to lay off a substantial portion of its workforce for a short period of time with the intention of rehiring (the same or different personnel) once its financial situation improves. The CAA temporarily changes the rules giving business owners additional time to increase employee headcount, thus avoiding classifying all such reductions as partial plan terminations. With the new legislation, a partial plan termination would not occur if the active number of plan participants as of March 31, 2021, is at least 80% of the active participant count on March 13, 2020 (the date the COVID-19 emergency was declared). 

The CAA’s temporary rule preventing certain partial plan terminations states:

“A plan shall not be treated as having a partial termination (within the meaning of 411(d)(3) of the Internal Revenue Code of 1986) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.

Be aware that a partial plan termination can lead to a full plan termination under certain circumstances

A partial plan termination results in immediate 100% vesting in all employer contributions (i.e. match, profit-sharing for all participants that have severed service both voluntarily and involuntarily). Notably, vesting does not need to be accelerated for participants not affected (those participants that remain employed).

Failure to fully vest the affected participants could result in distributed amounts being less than the amount accrued. Paying out affected participants less than the amount they rightly deserve could potentially cause the IRS to disqualify the plan if the affected participants are not made whole. In other words, without proper oversight, a partial plan termination could result in the entire retirement plan being disqualified. If the IRS disqualifies the plan, the plan’s trust ceases to be tax exempt and the 401(k) becomes taxable. What’s more, employer tax deductions for plan contributions will be impacted.


Learn more

To learn more about the CAA or other retirement-related legislation, talk to your local Lord Abbett Regional Manager, or call us at 888-522-2388.



401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

A 403(b) plan is a retirement savings plan that allows employees of public schools, nonprofit, and 501(c)(3) tax-exempt organizations to invest on a pretax and or Roth aftertax basis. Contributions to a 403(b) plan are conveniently deducted directly from your paycheck. In addition, your employer may elect to make a contribution on your behalf.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

These materials do not purport to provide any legal, tax, or accounting advice.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.




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