Employers may be looking for guidance on how to manage the company-sponsored retirement benefits for employees while balancing the company’s economic concerns brought on by the coronavirus (COVID-19) outbreak. We have outlined several strategies below that employers should consider:
- Coverage and change benefit options for existing employees; and/or
- Benefits continuation to employees whose hours are reduced, who are furloughed, or who are laid off.
Employer Options for Existing Employees
- Managing Deferral Contributions Obligations
- Excluding any plan-level provisions, employee deferral elections for the retirement plan are optional and can be changed at will.
- As long as an employee has earned income and an active deferral election, the employer is obligated to transmit contributions to the retirement accounts on a timely basis. Failure to transmit timely employee contributions can subject the company to IRS & DOL penalties.
- Decreasing or Discontinuing Funding for Employer Contributions
- Unless employer contribution provisions (match or profit sharing) are amended, employers will continue to be responsible for funding the retirement contribution liability. There are pre-existing provisions to address reduction/removal of employer contribution obligations, even for safe harbor contributions.
- Benefit Withdrawal Options for Active Employees
- Retirement benefits typically only have limited availability for distribution to active employees. The company’s plan document governs the available options, which typically are hardships, loans, and limited In-Service withdrawals. However, the federal government recently signed into effect the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act to reduce the red-tape around withdrawal options for active employees during the COVID-19 outbreak. Read more here: Sequoia article on retirement benefits under the new CARES Act
Employer Options During a Reduction in Hours, Furlough, or Reduction in Force
Due to the economic impact of COVID-19, employers may be forced to reduce employee hours, furlough (i.e. mandate unpaid time-off for) employees or undergo a reduction in force. Below we explore employer options under these circumstances:
- Continue Benefits for Employees who are Furloughed or have Reduced Hours
- With few exceptions, Employers will need to continue retirement benefit eligibility for furloughed employees. However, if there are no wages earned, deferral contributions are not applicable.
- Unless employer contribution provisions (match or profit sharing) are amended, employers will continue to be responsible for funding the retirement contribution liability. There are pre-existing provisions to address reduction/removal of employer contribution obligations.
- Furloughed employees with an active retirement loan should be provided leave of absence relief to defer loan payments. Employers should review their plan documents for specific guidance on leave of absence provisions.
- Benefit Withdrawal Options for Laid Off Employees
- Retirement benefits are typically fully distributable upon severance of employment, including lay-off. Normally, plan documents dictate that employees with active retirement loans will have to pay the outstanding principal within a grace period or be subject to loan default (taxation). However, many retirement recordkeepers are providing additional leniency on their loan default protocols during the COVID-19 situation.
- Additionally, Employers that provide vested benefits (e.g. employer match or profit sharing) should assess if any lay-off events (or in aggregate) exceeds the Partial Plan Termination threshold regulations. Should there be a significant reduction in force, Partial Plan Termination regulations require expedited vesting for impacted participants.
Additional Resources
- Sequoia companion article on Healthcare Benefit considerations
- Benefits Continuation During Furlough or Reduction in Hours
- DOL FAQ on Families First Coronavirus Response Act
- ARA FAQ on Coronavirus Aid, Relief, and Economic Security (“CARES”) Act
- Sequoia COVID-19 Resource microsite
The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.
