COVID-19’s potential impact on ESOP plan termination
In this unprecedented and uncertain time, questions abound about the impact of staff reductions on various aspects of employee stock ownership plans (ESOPs).
What triggers a partial plan termination?
The most substantial effect of significant staff reductions can be the triggering of what is known as a partial plan termination. This trigger generally occurs when more than 20% of plan participants are involuntarily terminated during the year. It does not matter that the layoffs are due to adverse economic conditions not within the employer’s control.
Participants who are furloughed are those who have had a period during which they are not working but who are expected to return to work. They are not treated as involuntarily terminated for plan purposes and are not counted as part of the 20%.
Participants who voluntarily terminate also are not included in the 20% calculation as long the company can prove on a person-by-person basis that each termination was voluntary. When determining whether a partial plan termination occurred, the IRS will consider whether participants who left voluntarily were constructively discharged and should be included in the 20% calculation. Factors considered for a constructive discharge include the employer's intent, working conditions, and the reasonably foreseeable impact of the employer's conduct on the employees. Participants who leave due to retirement (by the plan’s definition), death, or disability are not included in the 20% calculation.