Retirement Plan Considerations When Laying Off Employees

“Our college, like others, has closed due to the COVID-19 pandemic, and we are contemplating laying off a substantial portion of the workforce, at least temporarily. Are there any retirement plan considerations in doing so?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

There are a number of ways layoffs could impact your retirement plan. We list many of these below, but keep in mind that much of the impact to your plan will be dependent on your plan’s terms and the specific facts and circumstances of your situation.

One important consideration is whether employee layoffs will cause a partial termination of your plan.  Whether a partial termination has actually occurred is determined based on all of the relevant facts and circumstances, but the IRS flags the situation where at least 20% of active plan participants lose coverage under the plan due to an employer-initiated termination (such as a layoff). Note that if a partial plan termination does occur, all “affected employees” (at a minimum, those subject to layoff) must be fully vested in their account balance as of the date of the partial plan termination.

Additionally, layoffs could impact:

• Employer contributions – Will employer contributions still be required (e.g., safe harbor contributions, plan language that requires the participant to be employed on the last day of the plan year to receive the contribution, etc.)?
• Nondiscrimination testing for Employee Retirement Income Security Act (ERISA) 403(b) plans – If the layoff negates your obligation to make some or all of your employer contributions for the year, does that affect whether the plan satisfies the applicable nondiscrimination testing requirements?
• Distributions:
  • Does your plan permit distributions on severance from employment, regardless of the participant’s age (although they may be subject to the early withdrawal tax of 10% under Code section 72(t))?
  • Will CARES Act distributions be available to these employees?
• Loans:
  • How will you treat outstanding loans (e.g., can periodic repayments continue or will the loan balance be due on termination)?
  • Will the one-year suspension period under the CARES Act be available to these participants?
  • Will these participants be eligible to take a new loan under the increased loan limits of the CARES Act?

Another item to consider is whether this will actually be a layoff or just a furlough of these employees (as you note, this treatment could be temporary).

As you can see, there are a number of considerations relating to this decision. As such, we recommend that you consult with your plan’s legal counsel.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.