Surging Layoffs and Furloughs Raise Questions for Retirement Plans

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By Kristie Garrett, CFP®, CRPC®

Amid the ongoing health and economic crisis caused by the coronavirus pandemic, millions of Americans have lost their jobs, while countless others have been furloughed.

Some workers may receive severance; some may not. There are also crucial differences from an employee benefits perspective. ERISA attorneys warn that retirement plan sponsors should be aware that the “Internal Revenue Service … may determine that a partial termination of a plan has occurred if a company undergoes significant layoffs, but not furloughs.”

Furloughs are temporary and are typically only for a set period or a reduction of hours. In contrast, a layoff is a termination and separation of service. The hope that workers may be hired back is not a promise of return and may trigger a partial plan termination.

Partial Plan Terminations and Vesting Impact

Do you have a vesting schedule for employer match or profit-sharing contributions? That vesting schedule may become null and void in the case of a partial plan termination. In that scenario, all contributions are fully vested immediately, and the employer or remaining participants lose the benefit of forfeitures from unvested balances.

IRS Determination of Partial Plan Termination

While there is no clear line, the IRS generally declares a partial plan termination when 20 percent or more of participants separate from service through layoffs, severance, or termination. The classification does not include furloughed employees unless they were subsequently separated from service.

Examine how your plan counts employees’ service (hours, elapsed time, or another method). The IRS’s final decision is based on leading facts to determine if a partial plan termination occurred.

Distribution Options for Layoffs and Furloughs?

Terminated employees can tap vested 401(k) accounts or roll them over to another plan. However, this is not as clear for furloughed employees, who are still technically in service. Review your plan documents to determine if your plan allows for in-service distributions. There are special provisions within the CARES Act if the plan is amended to allow for coronavirus related distributions (CRDs).


Employee participants can continue to contribute and defer income into retirement plans during severance periods.  Post-severance benefits such as cash payouts, accrued sick leave, and vacation are not required to be included in the definition of compensation. However, if the plan does include benefit payouts within the definition of compensation, then a terminated employee will be able to make deferrals, earn matching, and other employer contributions even if paid out after the severance period.

Key Takeaways

As a retirement plan sponsor, part of the decision to lay off employees versus furloughing them should include a review of “unvested balances.”

When 20 percent or more of your workforce separates from service by layoff in the same plan year, the IRS guidance may trigger a partial plan termination. Furloughed employees do not count in this number unless they are subsequently laid off within the same plan year.

A partial plan termination immediately vests all contributions (including employer and profit-sharing contributions). By avoiding a partial plan termination, unvested balances return to the plan or employer. Your third-party administrator can confirm how unvested balances return under the forfeiture provisions of your plan.

Kristie Garrett, CFP®, CRPC® serves as a retirement plan advisor at Brighton Jones.

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