Planning to Make Layoffs? Here Are Some Key Benefits Issues to Consider
For qualified retirement plans (e.g., 401(k) 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 depends on the facts and circumstances surrounding the case. The IRS will, however, presume that a partial termination has occurred if the number of participants decreases by at least 20 percent during a 12-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. A termination is employer-initiated even if it is caused by events, such as depressed economic conditions, which are outside the employer's control.
The employer will usually calculate the percentage reduction using participant data for a plan year. But, if a series of terminations is related, the period over which the percentage must be calculated could be longer. So the calculation is cumulative, and while one layoff may not trigger a partial termination, the second or third could.
If a partial termination occurs, all participants whose termination was employer-initiated must become 100 percent vested in their benefits. That will likely increase the amount that
the participant is entitled to receive. From the employer's perspective, that means forfeitures counted on to pay expenses or offset future contributions will not be available, indirectly increasing costs. Failing to fully vest participants due to a partial termination could potentially disqualify the plan.
Most employers have heard that the new COBRA provisions set forth in the American Recovery and Reinvestment Act of 2009 apply to a reduction in force or layoff. Briefly, ARRA creates a 65 percent subsidy for COBRA premiums for employees (and their spouses and dependents) who elect COBRA due to the employee's involuntary termination, if it occurs between Sept. 1, 2008, and Dec. 31, 2009. In addition, the subsidy is subject to a number of conditions, and employers have several new notice requirements.
The new COBRA provisions are summarized 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. Also, the Department of Labor has issued model notices that employers may use, at www.irs.gov and www.dol.gov/cobra.
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 the Health Insurance Portability and Accountability Act of 1996. So, assume 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. Employee loses his job with Employer B. Can the spouse add Employee back to Employer A's health plan?
It appears so. As a qualified beneficiary, the spouse 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.
The legal issues, including benefits, triggered by a layoff or reduction in force can be overwhelming for an employer. Proper planning can help navigate around the potential land mines.
Debra Linder is an attorney with Fredrikson & Byron. She can be reached at firstname.lastname@example.org. Todd Guerrero is an attorney in Fredrikson & Byron 's renewable energy group. He can be reached at email@example.com.