Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
It’s mid-May, 2020, and every part of the country is in some stage of either planning to restart the economy or is doing so. It is certain to be a new world once everyone gets back on-line, and for some of you who will be either bringing back furloughed employees or rehiring, there are some things you should be considering with respect to your retirement plan.
With record unemployment numbers, it’s clear that many employers have downsized their companies either temporarily or permanently. In the “temporary” column are some employers who have laid off with an intent to rehire the same personnel as well as some employers who have terminated employees without the expectation of rehiring those specific employees when they start to come back on-line.
Once you start to bring back employees, you might have questions about when those employees should be permitted to contribute to their retirement plan. Moreover, what do you do with those employees who were maybe so new with your firm that they hadn’t yet qualified to participate in your plan. Where do they fall and when do we start the clock for them? Maybe they are eligible immediately upon returning to work? Maybe not? Who knows?
The good news is that there are rules to which we can turn for some of these answers. If you are rehiring employees who were already participating in your 401k program, they should be eligible to immediately begin deferring into your plan once you rehire them. A “separation from service” of only a couple of months is not great enough to qualify as a “break in service” which would require employees re-satisfy your plan’s eligibility requirements. They will also, most likely, not experience any gap for vesting purposes either.
Employees who had not yet met the eligibility requirement to participate in your plan should also pick up where they left off. For example, if you had an employee who was in the process of meeting the eligibility period, the time the employee was separated would count toward satisfying the waiting period. Sort of like they never left. Didn’t see that one, eh? Well, in truth it only works this way if your plan is on the "elapsed time" method versus "actual hours" method. Do you know which one your plan uses? Does your advisor? Some of these rules can be complicated.
If you are an employer who might not be rehiring a significant percentage of the laid off employees, you should also become familiar with “partial plan termination” rules. Generally, if 20% or more of your workforce is laid off, a partial plan termination will be deemed to have occurred with respect to those laid off/terminated employees and special vesting rules apply.
If you have questions about your plan’s operation and how to have a smooth restart once we get going again, please feel free to contact me at your convenience. These rules are not intuitive, and you want to get them right.
Pete Welsh a/k/a 401kGuy