Tag Archives: furlough

Understanding the impact of employees furloughed due to COVID-19 on defined contribution plans

In the wake of the coronavirus outbreak, one of the many issues plan sponsors face is determining whether employees will be furloughed and for how long.

What is a furlough?

A furlough is defined as an employer-implemented mandatory leave of absence from work, typically without pay—very similar to a temporary layoff or approved unpaid leave of absence. The idea is that workers will one day be able to return to their work.

What effect does an unpaid leave or furlough have on retirement 401(k) plans?

While furloughed employees still technically retain their jobs, they cease actively working for their employers and may or may not earn salaries. An employee on an unpaid furlough clearly would not be able to make new salary deferrals. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, an employee on an unpaid furlough is permitted a delay of up to one year for making loan repayments with due dates that fall between March 27, 2020, and December 31, 2020. Employer matching contribution obligations to a defined contribution (DC) retirement plan such as the 401(K) generally will cease once employee salary deferrals are discontinued, but employer “profit sharing” or nonelective contributions still may be due, depending upon the terms of the plan.

Employers will need to be vigilant when monitoring outstanding participant loans to ensure that any delinquencies are addressed promptly. In addition, the expanded availability of participant loans and hardship distributions under the CARES Act likely will create additional administrative work for employers where furloughed employees are involved.

Furloughed employees will not accrue hours of service if they are not working or receiving salaries. If no hours of service accrue, it may impact vesting as well as eligibility requirements for plan participation or contribution allocations. Upon returning to work from an unpaid leave or furlough, an otherwise eligible employee generally would be entitled to immediate reenrollment in a retirement plan.

Although a furlough is not a severance from employment, the Internal Revenue Service (IRS) could take the position that employees furloughed on a long-term basis, because of COVID-19, could be considered to have a severance from employment.

How does a furloughed employee, impacted by COVID-19, access retirement plan accounts?

The CARES Act has provided some relief for furloughed employees affected by COVID-19. Please refer to this Milliman benefits update to read more about coronavirus-related distributions (CRDs) and relaxed loan rules.

What about hardship withdrawal options because of this national emergency? Many plan documents state that hardships are allowed for the IRS safe harbor reasons. While the IRS safe harbor permits hardship withdrawals related to a Federal Emergency Management Agency (FEMA)-declared disaster, the state or area of primary residence would not only need to be declared a disaster area, but also must qualify for individual assistance. Without this specific situation applying, to permit these distributions, plan sponsors have to be comfortable deviating from the IRS safe harbor list of permissible hardship events.

If a plan sponsor would like to add a non-safe harbor hardship withdrawal in connection with COVID-19 and/or furloughs and layoffs, then a plan amendment is likely required.

Reading list: COVID-19 implication for pension plans

The financial effects of the COVID-19 pandemic is a big concern for pension plan sponsors. The following list of articles highlights several topics sponsors must consider to navigate the landscape successfully now and moving forward.

COVID-19 to leave multiemployer pension system more distressed than ever
By Kelly Coffing, Tim Connor, Nina Lantz

Activities in many industries have slowed with concern that the recovery of normal operation could take years, reducing the contributions coming into multiemployer pension plans. This Multiemployer Review explains how COVID-19 could leave the multiemployer pension system even more distressed.

Impact of COVID-19 on your pension plan: CARES Act funding relief for single-employer defined benefit plans
By Delbert Zamora

Single-employer defined benefit plan sponsors need to weigh the impact of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This article focuses on the CARES Act provision allowing deferment to January 1, 2021, of required plan contributions due in the 2020 calendar year.

Impact of COVID-19 on your pension plan: Market volatility and the effect on single-employer plans
By Scott Preppernau

The pandemic has created turmoil for the financial markets, raising profound and potentially long-lasting concerns for pension plan sponsors. This article explores several key financial measurements and plan requirements to help single-employer pensions traverse the current situation.

Pension risk management: COVID-19 FAQs
By William Strange

Market volatility resulting from the coronavirus outbreak has led many organizations to ask a variety of questions related to pension risk management. This FAQ highlights some of those questions with corresponding answers.

Impact of COVID-19 on your pension plan: Considerations for layoffs
By Jeff Baker

Many employers are implementing layoffs to maintain economic viability, which have the potential to create some unintended consequences to pension plans. This article focuses on several plan issues that sponsors should consider following a workforce reduction such as layoffs or furloughs.

Can multiemployer pension plans survive COVID-19?
By Ladd Preppernau and Carrie Vaughn

The effect of the coronavirus on the economy and financial markets has major implications for multiemployer plans. This Multiemployer Alert presents several questions and answers that sponsors must think about concerning their plans.

Unintended consequences of using your defined benefit plan to assist with workforce management

In just a few months, COVID-19 has changed our businesses and organizations dramatically—in the United States and around the world. Many employers have taken immediate action by increasing staff or staff hours, transitioning to remote workforces, reducing staff or staff hours, or even closing their doors completely.

If you are considering major changes in your workforce and think your defined benefit (DB) plan can help ease the pain of this transition, you will want to proceed carefully. With every action, there’s a reaction—often a good one but not always. Keep this in mind if you are increasing staff and are exploring:

  • In-service distributions: Amending the DB plan to allow for in-service distributions as early as 59½ can help retain key talent but it can also make the ongoing administration quite complicated as well as removing the component of orderly retirement, which is an important factor in DB plans. This added complexity is less of an issue if you have a frozen plan, and are looking to terminate it in the near future or de-risk it with an annuity purchase. In this case, more in-pay participants could result in better annuity pricing. You can also include employees over 59½ in frozen plan lump sum window offerings to save on Pension Benefit Guaranty Corporation (PBGC) headcount premiums.
  • Waiving suspension of benefits for rehired retirees: Rehiring retired professionals can be easier if you allow them to continue to collect their pension benefits while they work. But be aware that rehires who are subsequently laid off may be entitled to some form of paid leave. And this “double dipping” could increase plan costs due to the additional service earned.
  • Increasing Normal Retirement Age: Amending the plan to increase the Normal Retirement Age from 65 to, for example, 67 could help retain more experienced, needed talent at work. But as the talent pipeline starts to fill up again, you could risk suppressing personal growth. Young talent will go elsewhere if they see older workers blocking their career paths. And keeping more expensive talent around long-term could result in more expensive benefits at retirement from longer accrual periods.

If you are decreasing staff and are exploring:

  • An early retirement window: During a designated period, an early retirement window with enhanced benefits—often including temporary continuation of health insurance—can encourage retirement. The upside is that you can reduce active participant cost; the downside is that it can increase the plan cost over time if the plan is not well funded. Nondiscrimination and liquidity requirements also must be carefully considered when offering an early retirement window. Use projections to ensure you won’t trigger special accounting events (like settlements, curtailments, and special termination benefits, in both the pension plan and the post-retirement medical plan if applicable) or a partial plan termination if the plan is not frozen.
  • Lower Normal Retirement Age: Amending the plan to decrease the Normal Retirement Age would allow employees to collect full retirement benefits earlier while working elsewhere so workers may leave on their own accord. There could be a few downsides: Some may be entitled to full benefits as they retire early and increase the cost of the plan. Or you also risk losing high-quality workers to competitors.

It’s important to note that all of the above defined benefit plan changes could open collective bargaining agreements in place and may affect your nonqualified plan arrangements. Short-term and long-term impacts should be carefully considered.

To discuss the benefits and possible consequences of leveraging your defined benefit plan as you increase or decrease staff, contact your Milliman consultant today.

This blog post is the third of a three-part series on workforce management during the coronavirus pandemic.

Reducing staff? Your defined benefit plan can help ease the pain

The effect of COVID-19 has been devastating for some businesses. In a relatively short amount of time, we’ve seen thriving businesses brought to their knees—some closing temporarily or for good. Others, anticipating a longer recovery period, are considering some difficult changes such as laying off workers.

If your company is being forced to downsize or temporarily close, don’t forget that you can leverage your defined benefit plan during these difficult times. You can make the transition for your employees more palatable by:

  • Offering an early retirement window:During an early retirement window, you are able to offer enhanced benefits to encourage retirement. Consider offering medical benefits to bridge the gap and to make the offer even more worthwhile. Although an early retirement window reduces active participant cost, it can increase the cost of pensions paid over time (but is less problematic with well-funded plans).
  • Lowering Normal Retirement Age:Amending the plan to lower the Normal Retirement Age would allow employees to collect full retirement benefits earlier while working elsewhere. This should be carefully considered as you could risk losing high-quality workers to competitors, and a lower Normal Retirement Age becomes a permanent feature of the plan.

It’s possible you will need to consider more drastic action and close your doors permanently. If you are unable to fund, manage, or administer the plan, a plan termination is the likely scenario. In these unprecedented times, remember your defined benefit plan can ease the pain as you make difficult decisions such as workforce reductions.

As you consider taking action and want to discuss how you could leverage your defined benefit plan, contact your Milliman consultant.

This blog post is the second of a three-part series on workforce management during the coronavirus pandemic.