As the COVID-19 state of emergency continues, businesses are implementing and considering a variety of employee-related measures to manage the impact of the crisis. While some businesses may avail themselves of payroll protection programs and loans to maintain the status quo, others may be faced with having to implement reductions-in-force (RIFs), furloughs and layoffs.  Added to this, employers may be faced with larger numbers of leaves of absence both because of COVID-19-related health and family care reasons, but also when certain workers have been called to duty.  The following summarizes some of the considerations to keep in mind with respect to benefit plans governed by ERISA and other compensation arrangements when planning and implementing workforce reduction measures.

Partial Plan Terminations. Partial terminations of qualified retirement plans can result if there is a significant decrease in the percentage of participants covered by the plan during a plan year (or longer period if there are a series of related severances from employment) due to employer-initiated terminations of employment (i.e., any severance from employment, other than a severance that is on account of death, disability, retirement on or after normal retirement age, or voluntary separations). The IRS may also find that a partial plan termination occurred if a sponsor adopts amendments that adversely affect the rights of employees to vest in benefits under the plan, excludes a group of employees that previously had been included, or reduces or ceases future benefit accruals that can result in a reversion to the employer in a defined benefit plan. An active participant reduction in a pension plan may also be a reportable event to the PBGC, unless a waiver applies.

While courts have looked at differing factors to determine if a partial plan termination occurred, the IRS ruled in Revenue Ruling 2007-43 that if the participant turnover rate is at least 20%, there is a rebuttable presumption that a partial termination of the plan has occurred. If the employer cannot provide sufficient evidence to show that the turnover rate was routine or was not the result of employer-initiated severance from employment, the presumption of a partial termination will stand and the affected participants, including those who voluntarily terminated during the applicable period, must be fully vested in their account balance (or accrued benefit, as applicable) as of the date of the partial plan termination in order for the plan to be qualified under the tax code.  Thus, an analysis of potential partial plan terminations should always be undertaken in the event of significant workforce reductions.

Qualified Plan Loans.  Sponsors of qualified plans that permit plan loans that are contemplating temporary furloughs or a program of unpaid leaves of absence should check the plan documents to determine how the plan loans of the affected employees will be treated.  A plan may, but is not required to, suspend a participant’s loan repayments during an unpaid bona fide leave of absence, but whether it can do so is based on the sponsor’s leave of absence policy.  Before implementing furloughs or unpaid leaves, a sponsor may want to consider amending a plan that does not provide for suspensions of repayments.  Even without amendment, however, if the plan participant is a “qualified individual” as defined under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), outstanding loan repayments through December 31, 2020 could be suspended for up to 12 months (“CARES Act Suspension”).  A qualified individual is a participant who is, or whose spouse or dependent is, diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention or a participant who experiences adverse financial consequences because of being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19; being unable to work due to lack of childcare on account of COVID-19; the closing or reduced hours of a business owned or operated by the individual due to COVID-19; or other factors as may be determined by the Secretary of Treasury.

The terms of the plan will also determine the consequences of termination of employment on employees with outstanding plan loans.  A plan may provide that termination of employment is an event of default, which will trigger a plan distribution equal to the amount of the loan and tax obligations for the employee. Alternatively, a plan could provide that termination of employment results in acceleration of the payment obligation, making the entire outstanding balance immediately due and payable.  If the loan is accelerated, the plan could provide the employee with reasonable period of time to repay the loan before triggering a default.  Finally, a plan could permit terminated participants to continue repaying the loan post-termination, subject to record keeper requirements.  While not entirely clear, if a plan permits post-termination repayment, the participant may be able to request a CARES Act Suspension.  Additional guidance from the IRS on the CARES Act Suspension is needed. As with furloughs and unpaid leaves, before implementing a RIF or layoffs, plan sponsors should review the loan provisions in their plans to determine if any amendments are appropriate.

Health and Welfare Plan Eligibility.  Health and welfare benefits coverage for employees who experience a loss of employment as a result of COVID-19 issues would typically be handled like any other termination of employment. Many employers, however, have been considering what actions they might to assist employees after loss of employment in light of this national health emergency.

Before taking action with respect benefit plans, employers should carefully review applicable plan documents, including insurance policies, to ensure that any action, especially any extension of “active” coverage for furloughed employees, is consistent with plan terms. If the plan’s terms are silent, employers may amend their plans to provide for the desired coverage. However, employers should obtain approval from their insurer (including stop loss policy insurer) to mitigate the risk of the carrier denying any claims (and the employer having to self-insure the costs). As discussed further below, depending on how an employer determines who is a full-time employee, not extending group health plan coverage offers to furloughed employees could result in ACA penalties.

At this time, Internal Revenue Code Section 125 rules have not been changed to allow election changes mid-year because of COVID-19. Unless the Section 125 permissible election change event rules otherwise allow for a change given the employee’s employment circumstances (e.g., commencement of or return from an unpaid leave) that corresponds with a change in status that causes a loss of eligibility under an employer’s group health plan. Currently, therefore, furloughed employees offered a special enrollment window to elect health coverage because of COVID-19 would need to pay their share of any health insurance premiums for a mid-year enrollment on after-tax basis, outside of an employer’s Section 125 plan. Any changes to eligibility for coverage and how coverage is paid should be documented as required in applicable plan documents (e.g., “wraps”) and timely communicated to employees.  For more guidelines and legal issues to consider when deciding whether to extend group health plan coverage see Benefits Guide in the Time of COVID-19: Continuing Employer Group Health Coverage During Temporary Layoffs or Furloughs.

Many life insurance and long-term disability insurers are allowing coverage to be extended for a limited time after employees are furloughed (i.e., waiving “actively-at-work” requirements). Employers that wish to extend coverage should contact their insurers to negotiate the terms of any extension. Employees that lose coverage as a result of layoffs may have the right to convert the policy to an individual policy.

Of additional note, in light of the COVID-19 crisis, several states (including Colorado, Connecticut, Maryland, Massachusetts, Nevada, New York, Rhode Island, and Washington) have reopened or have extended the availability of their state marketplaces to permit uninsured individuals to enroll in. Currently, the Trump Administration has decided against opening a special enrollment period on the Federal Exchange.

COBRA Continuation Coverage. Employers reducing their workforce through the use of RIFs, temporary layoffs or temporary furloughs should be mindful of potential COBRA obligations under federal law (and possibly state law if the plan is subject to a state’s COBRA extension rules). Federal COBRA rules apply if an employer with 20 or more employees sponsors a group health plan. Under COBRA, employers must offer continuation of coverage to employees, former employees and their dependents when group health plan coverage is lost due to certain qualifying events, such as termination of employment or reduction of hours.

In the case of a temporary layoff or furlough, if  under the terms of the plan, the temporary layoff or furlough results in a reduction in hours that results in a loss of healthcare coverage, then a COBRA qualifying event has occurred and the employer should comply with COBRA election rules. However, if the group health plan permits laid-off or furloughed employees to continue participation in the group health plan, then a COBRA qualifying event has not occurred because there is no loss of coverage. If, after a period of time, active coverage is no longer extended to the laid-off or furloughed worker, the COBRA qualifying event should occur at that future point in time if the loss of coverage still results from the reduction of hours. Thus, employers in determining whether or not conduct RIFs or implement temporary layoffs and furloughs should keep in mind its COBRA obligations and whether such actions constitutes qualifying events.

Currently, the federal government is not offering COBRA subsidies to terminated employees, as it did during the 2007-2009 Great Recession.

ACA Information Reporting. An issue that may not be at the forefront of employers’ minds, is how any temporary layoffs and furlough of employees may affect their Affordable Care Act (ACA) reporting obligations. Under the ACA, an employer with 50 or more full-time employees that sponsors a group health plan should offer minimum essential coverage to at least 95% of its full-time employees (and their dependents), and such coverage must meet affordability and minimum value requirements under the Code. Failure to do so may result in the employer being subject to employer shared responsibility penalties under Section 4980H of the Code. Employees may lose group health coverage for the period of time they are furloughed and laid-off because they are not working the required number of hours for coverage under their employer’s group health plan.

Temporary layoffs and furloughs may lead to inaccurate reporting by employers to the IRS as a result of improper accounting of full-time status (i.e., working 30 hours or more per week) or failure to account for the actual number of full-time employees over the plan year. This could ultimately result in significant penalties by the IRS through failure to offer group health plan coverage as required or failure to properly report accurate information related to the number of full-time employees on annual forms. Employers using a measurement method to track full-time status may want to determine whether, because of any temporary layoffs and furloughs, a monthly measurement method or the look-back measurement method is beneficial to the employer for determining full-time status at this time. In addition, employers should be aware of how breaks-in-service following a rehire of previously furloughed and laid-off employees affect eligibility provisions and waiting periods under the group health plan. Employers should be mindful of the Rule of Parity, which may be used in determining whether an employee is eligible for an offer of coverage, if the break in service is at least four weeks long (consecutively) and no more than 13 weeks (for most employers). Failure to understand and properly track these issues may result in violations under the ACA.

USERRA. Special health and retirement benefit continuation coverage rules apply to employees who are called up for military duty by federal authority (including National Guard and Reserve duty) under the Uniformed Services Employment and Reemployment Rights Act (“USERRA”). (If an employee is called up under state authority, similar state laws may apply.)

Severance Benefits. Employers contemplating a reduction in force should evaluate their existing obligations to pay severance benefits, whether to offer additional severance benefits, and the specific contours of any additional severance benefits. Severance obligations vary based on whether an employer has a written severance plan or policy and, if so, whether the plan is subject to ERISA.  Generally, a severance arrangement will be considered a plan subject to ERISA if the arrangement requires an ongoing administrative scheme. By contrast, employers may establish a one-time, non-discretionary fixed payment due to a limited event (such as a plant closing) without creating an ERISA plan.  Employers with severance plans governed by ERISA must administer their plans in accordance with the written plan document.  An issue such employers may face is whether employees impacted by a temporary furlough or reduction in hours are eligible to receive benefits under the terms of their severance plan document.

Regardless of whether they have a written plan, employers can offer impacted employees additional severance benefits customized to suit the needs of both the employer and impacted employees.  Factors to consider in crafting severance benefits include: (a) structuring benefit payments to not interfere with unemployment insurance benefits; (b) structuring a portion of the benefit to satisfy employer obligations under the federal WARN Act or state WARN acts; and (c) additional conditions to receipt of severance benefits (e.g., release of claims and return of employer property).

Executive Compensation. To mitigate financial pressure in the context of a downsizing, many employers are reassessing the cost and expense of their existing executive compensation arrangements. Employers wishing to modify executive compensation arrangements, should consider the following legal issues:

• Corporate Authority. Employers should confirm which persons (e.g., key management, board of directors, compensation committee) are empowered to make the changes.
• Executive Salary Reduction. Employers should review executive agreements to confirm whether executive consent is necessary, and whether a salary reduction without consent would trigger “good reason” termination rights for an executive. Wage and hour notice requirements also may apply to a salary reduction.
• Section 409A and Deferred Compensation. Changes to deferred compensation plans, including changes to deferral elections or distributions, could violate Section 409A of the Internal Revenue Code (“Section 409A”) and result in tax penalties. Plans may allow for special distributions upon disability or unforeseeable emergency, or terminate the plan entirely, under Section 409A, but the application of the rules depend on the terms of the plan and plan amendments and terminations may be significantly restricted under Section 409A. Also employers should consider whether a temporary leave of absence or furlough constitutes a separation from service under Section 409A entitling an executive to a distribution.
• Performance-Based Compensation. Employers might consider modifying 2020 performance goals for annual bonuses, performance vesting equity awards, and long term incentive plans in light of the drastically changed economic landscape. Note that modification may not be feasible under the terms of such compensation arrangements.
• Eligibility for Vesting or Payments upon Leave of Absence or Furlough. Employers should also confirm whether an employee’s leave of absence or furlough due to the COVID-19 outbreak entitles an employee to partial or full vesting or payment under the employer’s equity incentive compensation plans, employment agreements, severance agreements, short and long term bonuses or other long-term incentive compensation. This may also raise issues under Section 409A as discussed above.
• Executive Compensation Restrictions under CARES Act Loans. Employers that wish to apply for loans provided under Title IV of the CARES Act must comply with executive compensation restrictions for the duration of the loan. Different restrictions apply to employees whose total compensation (salary, bonuses, equity awards, and other financial benefits) exceeded $425,000 in calendar year 2019; and employees whose total compensation exceeded $3,000,000 in calendar year 2019. (For more details regarding these restrictions, see Epstein Becker & Green’s Act NowAdvisory “The CARES Act: What Employers Need to Know (Part II)”.

Multiemployer Pension Plan Withdrawal Liability. Layoffs and facility closures may trigger withdrawal liability depending on whether an employer who contributes to a multiemployer pension plan incurs a complete withdrawal or a partial withdrawal.  If this occurs, and the plan has unfunded vested benefits allocable to the employer, the plan will assess withdrawal liability (for which the employer and its controlled group have joint and several liability). A complete withdrawal occurs when an employer ceases contributions because it has terminated all operations covered by the plan or no longer has an obligation to contribute to the plan.  Many COVID-19-related layoffs and closures may only be temporary, however, and may not qualify as a complete withdrawal.  On the other hand, a partial withdrawal can be triggered upon a 70% contribution decline over a three-year testing period or a partial cessation of an employer’s contribution obligation. A significant decline in an employer’s obligation to contribute to a multiemployer pension plan, by way of RIFs or plant closures, can trigger a partial withdrawal resulting in withdrawal liability for the employer. Given the legal intricacies and fact-specific nature of withdrawal liability -not to mention theories of successor liability- carefully considering these issues is highly advisable.

ERISA Litigation Considerations. Downsizing raises the specter of litigation for a myriad of reasons. Two controllable risks involve accusations of breach of fiduciary duty in communications about employee benefits and potential claims based on violation of ERISA Section 510 for interference with vested employee benefits.

• Communications. ERISA imposes fiduciary duties for certain communications regarding employee benefits. When employees inquire about their benefits, they are owed honest and accurate information. Managers who do not possess expertise, or have not been trained, in the company’s benefits should be instructed to refer employees to those persons who do; unnecessary exposure can arise when uninformed managers attempt to assuage employees about retirement, healthcare, or other benefits that may influence employees’ decisions to terminate employment or to cope with involuntary unemployment. Corollary to this risk, if an employer chooses to offer incentives to employees to induce retirement or encourage voluntary separation, communications about those incentives must be honest and complete. This includes disclosure of any future programs that have reached the stage of “serious consideration” – when (1) a specific proposal (2) is being discussed for purposes of implementation (3) by senior management with the authority to implement the change. This duty does not require a fiduciary to disclose its internal deliberations nor, in a union-represented workplace, interfere with the substantive aspects of the collective bargaining process. The watchword is candor and the best prophylactic against litigation lies in managing the information flow through well informed benefit professionals.
• Vesting Issues. Another ERISA litigation risk arises from employees who may be near vesting, or another significant benefit milestone, when their employment terminates involuntarily. They may contend that the termination resulted from an illegal motive to interfere with that benefit milestone. Section 510 of ERISA exists to deter and prevent unscrupulous employers from discharging or harassing their employees in order to keep them from obtaining vested pension or other benefit rights. An employer violates Section 510 if an employment action is, at least in part, motivated by the specific intent to engage in activity prohibited by the statute, such as interfering with an employee obtaining vested benefits. Minimizing exposure to these claims involves an awareness of the risk and a vetting of the criteria used to select employees for termination to ensure that benefit issues do not influence the choices made.