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Debra J. Linder

Debra J. Linder Compensation Planning & Employee Benefits

dlinder@fredlaw.com
612.492.7163
Printable Version

Are You Laying Off Employees or Planning To? Here Are Some Key Benefits Issues You May Need to Consider

By: DEBRA J. LINDER

April 2009

There are many legal and practical issues surrounding workforce reductions, layoffs, and other cost containment measures such as furloughs, reduced work schedules, and compensation adjustment. In this time of economic crisis, our clients frequently seek our assistance in implementing the various alternatives for tightening the Company belt. Members of our Employment Law and Benefits Groups are pleased to assist in addressing both the legal and practical implementation of workforce adjustments. Past articles on the topic in this newsletter have focused on such areas as avoiding the potential for discriminatory impact, federal Worker Adjustment and Retraining Notification Act obligations, and other overall employer obligations. Among the myriad of legal and practical considerations are the impact of workforce adjustments on employee benefits, such as the Company’s retirement plan(s) and COBRA obligations.

Partial Termination of Retirement Plan


For qualified retirement plans (e.g., 401(k), pension, and profit sharing plans), there is a concept called a “partial termination.” A partial termination occurs when a significant number of participants are terminated due to layoffs or other employer-initiated terminations. The determination of whether a partial termination has occurred often depends on the facts and circumstances surrounding the terminations. However, the IRS will presume that a partial termination occurs if the number of participants decreases by at least 20% during a twelve-month period, usually the plan year.

To calculate the percentage reduction, the employer divides (1) the number of participants who had an employer-initiated termination of employment (e.g., layoff, plant closure, or firing) during the plan year by (2) the sum of all participants at the beginning of the plan year plus employees who became participants during the plan year. All participants, vested and unvested, must be taken into account to calculate the percentage reduction. Participants who voluntarily terminate or who terminate due to death, disability, or retirement are not counted in the equation. Note that a termination is employer-initiated even if it is caused by events outside the employer’s control, such as depressed economic conditions.

Normally, the employer will calculate the percentage reduction using participant data for a plan year. But, if a series of terminations are related, the period over which the percentage must be calculated could be longer. And, the calculation is cumulative. So, while one layoff may not trigger a partial termination, the second or third could trigger it.

If a partial termination occurs, all participants whose termination was employer-initiated must become 100% vested in their benefits. That will likely increase the amount that the participant is entitled to receive. From the employer’s perspective, that means that forfeitures the employer may have counted on to pay plan expenses or offset future contributions will not be available, indirectly increasing the employer’s costs under the qualified plan. Failing to fully vest participants due to a partial termination could potentially disqualify the plan.

COBRA Considerations


By now, most employers have heard that the new COBRA provisions set forth in the American Recovery and Reinvestment Act of 2009 (ARRA) apply to a reduction in force or layoff scenario. Briefly, ARRA creates a 65% subsidy for COBRA premiums for employees (and their spouses and dependents) who elect COBRA due to the employee’s involuntary termination if that termination occurs between September 1, 2008, and December 31, 2009. The subsidy is subject to a number of conditions. ARRA also creates several new notice requirements for employers.

The new COBRA provisions were summarized in our recent client advisory, which can be accessed at www.fredlaw.com/articles. Additionally, both the Internal Revenue Service and the Department of Labor have issued guidance in the form of questions and answers, and the Department of Labor has issued model notices that employers may use. This information can be accessed at www.irs.gov and www.dol.gov/cobra. Employers should check these Web sites periodically, as both agencies continue to update their respective Web sites.

There are, however, other COBRA considerations. Employers know that, if an employee is laid off, he or she has the right to continue coverage under the employer’s group health plan. In addition, the employee’s spouse and dependent children have separate COBRA rights. All of these individuals also have special enrollment rights under HIPAA. So, consider this scenario. Employee is laid off at Employer A and elects COBRA coverage for himself and his spouse. Employee finds another job with Employer B, but the spouse keeps her COBRA coverage under Employer A’s health plan, which she has the right to do. Employee loses his job with Employer B. Can the spouse add Employee back to Employer A’s health plan?

It appears so. The spouse, as a qualified beneficiary, has the same HIPAA special enrollment rights that are available to Employer A’s active employees. Those special enrollment rights include enrolling Employee due to Employee’s loss of health coverage with Employer B. The IRS regulations suggest that the spouse could enroll Employee on Employer A’s health plan, but only for the balance of the 18‑month COBRA period measured from the date of Employee’s layoff at Employer A. If Employee wanted a new 18‑month COBRA period, he would have to elect COBRA under Employer B’s plan.

Takeaway


The legal issues, including the benefits issues, triggered by a layoff or reduction in force can be overwhelming for an employer. Proper planning can help employers navigate around the potential land mines. If, during these difficult economic times, you find your company considering a layoff or reduction in force, please contact any member of our Benefits Group to work through the various legal requirements that may apply to your company’s benefits plans.