Of course, the most important issue of this week in March 2020 is your personal health and safety. I understand that and know that is of paramount concern.
Nonetheless, as an ERISA attorney who handles Retirement/Health/Welfare and related tax issues, I write this post knowing that employers across our country have been in late night strategy sessions, weekend meetings, and telephonic conferences, all in response to the virus and its economic fallout.
The Coronavirus has US businesses asking what can be done with respect to conserving cash resources and how to handle 401(k), 403(b), health insurance, COBRA, and other ancillary benefits. These are the Top 8 Issues companies struggled with these few days.
US businesses are struggling not only with COVID-19 but with its financial impact, given the lower demand for services and products and consequent furloughs and layoffs of employees. I've listed below, in Q&A form, the top eight 401(k), health insurance, and other employee benefit issues I've had to respond to, evaluate, and execute on behalf of employers these past several days.
I write this for those who don't have an ERISA technical background, but who may need nitty-gritty plain English explanations to some pressing questions:
Question-1: Safe Harbor 401(k) Plan
We have a safe harbor 401(k) plan. Can we stop employer portion of contributions for 2020?
Yes. If your safe harbor notice language acknowledged the right to reduce or suspend future employer contributions, work on this right now.
Do not worry if you didn't have that language, because if your company can support that it is operating at an economic loss (it likely can), you can also stop future safe harbor contributions.
Work with your Third Party Administrator -- or ERISA counsel, if necessary -- to do this. You will need to amend your plan document and to provide a 30-day notice to employees that allow them to change their own contributions into the 401(k) plan before your suspend your own contributions.
You will be required to run and pass more discrimination tests if you stop these contributions, but you can deal with that effect much, much later in the 2020 plan year.
Question-2: Non-Safe Harbor 401(k) Plan
We don't have a safe harbor 401(k) plan, but a fixed match for each payroll period. Can we stop making the match to our non-safe harbor 401(k) plan?
[Or: We have a 403(b) plan where we have a fixed match percentage for each payroll. Can we stop making the 403(b) matches?]
Absolutely. Make sure that you have paid (or accrued for) all matches to date. Then, effective for the first payroll period after that, amend the plan document prospectively to cut out all employer contributions for 2020 to the plan. You do not need a 30-day notice here, but you should let your employees know that prospectively, there won't be a match (or whichever employer contribution) for 2020.
Watch your discrimination tests at year-end (not now during this crisis), as the results might affect what you might have to do for corrective action, as a result of stoping these match amounts.
Question-3: Company Stock Inside of 401(k) Plan
We are a public company and have our company stock as one of the investment elections inside of our 401(k) plan. Our stock price has dropped. What should we do, now that the value of our stock (inside and out of the 401(k) plan) has dropped?
Call an immediate (perhaps telephonic) meeting with your Retirement Committee and your outside financial advisor. As ERISA fiduciary obligations make you analyze all investments inside your 401(k) plan for continued prudence, consider removing any future matches you make in company stock, alerting employees that you might stop their investing further into company stock, and/or mapping into another, stable fund. Those companies facing bankruptcy should determine if the company stock as an investment option at all inside the 401(k) plan is even appropriate.
Question-4: ROBS (or Rollover for Business Start-ups)
We hold private employer C-corp stock in our 401(k) plan, which we created using ROBS financing. With the downturn in the market, what should we do?
There is nothing to do right now. At year-end, be sure to get a proper valuation of your stock to provide to your Third Party Administrator so that it can properly record the fair market value of employer securities inside participant accounts.
Question-5: Effect of Furloughs and Layoffs on Retirement Plans
We have terminated about 1/3 of our workforce to plant closings, furloughs, and layoffs. What effect is there on our retirement plan?
There is nothing to do right now. You should work with your Third Party Administrator, but only at year-end, if you laid off or terminated more than 20% of your workforce, because you will experience a partial termination.
As noted, there's nothing to worry about right now to do with the plan, as you are making these furloughs. Partial terminations typically occur due to adverse economic conditions and/or reasons like COVID-19, which are outside of the employer’s control.
Question-6: COBRA With Respect to Furloughed Employees
Do we have to offer COBRA to our furloughed employees?
Employer Lets Employee Keep Health Insurance While Furloughed
If you just furloughed employees (with the likelihood of calling them back to work), then a COBRA to continuation of health insurance from doesn’t attach.
That is – while there is a reduction in hours (meaning zero hours worked) – you may nonetheless be allowing the furloughed employees to keep company health insurance (and not go onto COBRA). Note what this means: if you are letting the employee keep the health insurance, and if you are still making the same employer portion of the premium (if you contribute at all) for each pay period (when the employee has no pay).
If the employee has no pay (as in this situation), then the employer must ask the employee to pay his portion, when they are receiving NO money. Thus, the employee is paying for health insurance with after-tax dollars (rather than pre-tax, when things are normal). Or, you can accrue what the furloughed employee owes in arrears, and then get consent for you to withhold the accrued premiums in arrears so that the employee can use pre-tax dollars to pay for health insurance.
Employee's Health Insurance Stops At Furlough
If you instead treat health insurance as ending upon furlough (or the end of the month of the furlough, which is usually when insurance carriers run the insurance), then you should just offer COBRA, but it is typically at a HIGHER cost to the employee (because the employer may no longer subsidize for a furloughed employee, premium and/or there may be an additional cost for administration.
Note: allowing the furloughed employees to have COBRA might be a benevolent gesture from the employer, though it would likely not appear that way. That is, generally, an employee could delay even paying for COBRA for several months.
See this timeline below for a typical COBRA election (and actual payment) for the loss of group health coverage due to furlough of employment is as follows:
- Employment terminates and subsequently group plan coverage ceases.
- Employer has 30 days from the loss of coverage to notify the COBRA plan administrator.
- COBRA plan administrator has 14 days to provide the election notice to the furloughed employee/qualified beneficiary.
- The furloughed employee has 60 days from the date of the notification to make an election to continue enrollment in the plan.
- The furloughed has 45 days to pay the first premium (but if the employee has waited several months since termination, all premiums for all months will then be due).
COBRA law further allows the now terminated employee a grace period of up to 30 days from the first of each month when the next month's premium is due.
Employers must coordinate with their insurance carriers when making any decisions re: health, medical, dental, and other ancillary benefits.
Read those plan documents for precise language on how terminated employees are treated.
Question-7: Life Insurance, Short-Term Disability, Long-Term Disability for Furloughed
While we might allow furloughed employees to keep our health insurance (rather than start them on COBRA), can we do the same with our ancillary benefits identified above?
You must always go to the actual plan documents for these ancillary benefits to determine what they say. In the last several that I've examined during this economic downturn, this has been the most common language:
If you are not actively at work due to temporary lay-off or leave of absence, your coverage will stop on the last full day you are actively at work before the start of the lay-off or leave of absence.
If this is the provision you have, then unequivocally this means a furloughed employee will lose this ancillary benefit. For life insurance, allow the employee a conversion privilege option, if there is one (allowing the employee to now -- on his own fully, without contribution from the employer -- to pick up the full cost of the life insurance policy, after furlough).
Question-8: Life Insurance, Short-Term Disability, Long-Term Disability for Those Sick fro COVID-19
What if someone who is not furloughed is home sick, due to COVID-19?
Most ancillary benefits have a provision similar to this:
If you are not actively at work due to illness or injury, your coverage may continue, until stopped by your employer, but not beyond 12 months from the start of the absence.
Here, hopefully, you can see the distinction. The ancillary benefits will continue for a sick employee, but not one who has been furloughed.