Benefit Plan Considerations for Employers During a Market Downturn | Goodwin

When markets are unpredictable, employers may be required to make business decisions that may have unintended effects on their pension and health and welfare benefit plans. Employers should keep the following considerations in mind to ensure they meet their benefit plan obligations.

Continuation of benefits during layoffs, furloughs and other leaves of absence

Employers looking to control costs by downsizing should be aware that implementing a “layoff” may have a different impact on their benefit plans than implementing a “leave of absence”. “. Indeed, a “layoff” generally means a termination of employment (and subsequently a termination of participation in the benefits plan), while a “leave” generally means that an employee is in a unpaid, non-active status where no duties are performed, often with the expectation that he or she will return to work at a later date.

Since, for employees on leave, the employment relationship remains intact, it is possible that they may continue to participate in their employer’s benefit plans if the terms of the plan so provide. For example, in the context of health and welfare benefits, plan documents and insurance contracts often define eligibility for coverage based on “active” employee status (usually based on the number of hours worked per week). Employers should review the terms of their insurance plans and contracts to determine whether furloughed, non-active employees remain eligible for benefits. Otherwise, employers may find themselves responsible for providing benefits (either the cost of coverage or the cost of actual claims) if they have promised furloughed employees coverage that the insurer has not agreed to provide. Employers who maintain self-insured plans should review the terms of their contract with any stop-loss insurer for the same reason. If a plan does not currently cover furloughed employees but the employer and insurer agree to do so, the written insurance contract and plan documents will need to be amended.

Employees affected by a layoff, furlough, or downsizing may be eligible for COBRA coverage to continue their health benefits. To qualify for federal COBRA* coverage, an employee must experience both a triggering event and a loss of coverage. A trigger event includes not only a termination, but also a reduction in hours, but such an event must also result in a loss of coverage within COBRA’s typical 18-month maximum coverage period. The timing of COBRA election notices, the start of the maximum coverage period, and the impact of the Affordable Care Act requirements are complex issues that employers should discuss with their service provider(s). COBRA and/or their attorney.

*Note: Employers with less than 20 employees should be aware of state “mini-COBRA” laws; some states also provide continuance rights that supplement the federal COBRA.

Employer Contribution Holidays for Defined Contribution Pension Plans

Employers looking to control costs may also consider temporarily suspending or even eliminating company matching or profit-sharing contributions to defined contribution pension plans (e.g., 401(k) plans) ). (Please note that different rules apply to defined benefit pension plans and multi-employer plans, which are not covered by this alert.) An employer’s ability to make this change depends on their plan design. For example, employers who sponsor Safe Harbor 401(k) plans must make annual contributions to be exempt from certain non-discrimination test requirements. Applicable regulations generally provide that sponsors of waiver plan plans may only suspend such contributions if the employer suffers an economic loss or if the annual waiver notice provides that the employer may suspend such contributions. If so, plan sponsors must issue a notice describing the change 30 days prior to the effective date of the change. A mid-year suspension will also require the plan sponsor to perform certain non-discrimination tests for the plan year in which the change occurs.

Plan sponsors that are not safe harbor plans have greater flexibility when implementing changes to their employer contribution provisions. If the employer contribution is purely discretionary (for example, if the plan sponsor simply declares its contribution, if any, at the end of each plan year), a plan amendment may not be necessary. Alternatively, employer contributions may be adjusted prospectively through a plan amendment. Note, however, that ERISA and the Internal Revenue Code contain strict provisions regarding the elimination or reduction of benefits that may have been accrued by participants. It is important to consult legal counsel before making changes to employer contributions, as additional considerations may apply regarding ineligible reductions and mid-year vested benefits.

Loan Distributions and Difficulties

Employers aren’t the only ones looking for ways to ease financial uncertainty or cover unexpected extra costs. Pension plan participants may also be interested in accessing additional financial resources. Participants may wish to take out plan loans or need to receive distributions in times of hardship, and plan sponsors should anticipate whether changes may be needed to facilitate this. For example, plan sponsors may wish to increase participant loan limits or expand the hardship allocation options allowed. Amendments will generally require amendments to the plan and changes to other plan-related documents (such as a summary description of the plan or the plan’s loan procedures), and generally can only be implemented on a prospective basis. This means that sponsors of calendar year defined contribution plans should determine in 2022 if any changes will be implemented for plan year 2023.

Partial and total termination of the plan

Large-scale reductions in effect can have unintended consequences for an employer’s pension plan. Generally, a “partial plan termination” occurs when more than 20% of plan members have an employer-initiated termination, even if the involuntary termination is caused for reasons beyond the employer’s control (such as an economic downturn). An employer-initiated termination is generally any involuntary termination of employment other than death, disability, or retirement at or after normal retirement age. Upon partial termination of the plan, the affected participants shall be fully vested in all amounts credited to their accounts and in all benefits accrued up to the date of partial termination. It is important to note that for this purpose, “affected participants” include all participating employees who experienced a termination of employment during the applicable period, even if they voluntarily terminated their employment. The “applicable period” is generally one plan year, although it may be longer if there is a series of related terminations. For Short Plan Years, the “Applicable Period” includes the Short Plan Year and the previous Plan Year. Employers should work with their legal counsel and other advisors to determine whether their pension plans have had a partial plan termination and, if so, which participants need accelerated vesting.

Some employers may find themselves wanting to terminate their pension plans for all members. A plan is considered fully terminated only if the plan sponsor sets a specific termination date, determines the benefits and obligations of the plan on that date, and distributes all plan assets as soon as administratively possible (usually within 12 months following the date of termination). All participants must also be 100% vested in their accounts at the end of the plan. Employers must appoint a plan trustee who can manage the termination process, possibly including filing a final decision letter, preparing the final Form 5500, working with the accountant to distribute assets, and managing ( and ultimately termination) of plan service providers throughout termination. treat. Note also that this is a general description of plan termination considerations and that particular issues arise if an employer is considering termination of a defined benefit pension plan (rather than a defined benefit pension plan). defined contributions, such as a 401(k) plan).

Plan investment and fiduciary considerations

In light of continued market volatility, plan trustees should review plan investments and investment policies on a regular and periodic basis. Decisions must be documented (for example, in minutes of plan investment committee meetings) and must comply with the plan’s investment policy statement and applicable procedures. Plan trustees should also work with their plan’s investment advisors to determine whether changes to the plan’s investment mix or investment policy are desirable.

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