Part 1: Introduction
Some economists are now predicting a global economic downturn as soon as 2020, as indicators from bonds, interest rates, currencies, and commodities signal declining growth, including the recent inversion of the yield curve. While there is not a consensus on this point (as George Bernard Shaw once said, “if all economists were laid end to end, they would still not reach a conclusion”), it’s hard to ignore the growing chorus. There is no doubt that the ebbs and flows of the economy and business trends impact employee benefit plans and the employers that sponsor them, often leading to hard decisions to reduce or eliminate benefits. Poor execution can turn already difficult decisions into potential liabilities and result in a devastating increase to employer costs.
This blog series will explore common benefits cost reduction decisions and associated compliance pitfalls. Future blog posts will consider, among other topics—
- Reductions in Employer Contributions to a 401(k) Plan: Employers are generally free to make changes to employer contributions to a 401(k) plan but must do so in accordance with a variety of legal requirements. Failure to properly implement changes can create fiduciary risk and potential loss of tax-qualified status of the plan.
- Terminating a 401(k) Plan: Plan termination may result in significant cost savings, but also must be accomplished in accordance with legal requirements. Nor is plan termination a quick and painless process: plan documents must be updated, and missing participants must be addressed. Missteps in properly communicating and implementing a termination may also carry fiduciary risks.
- Partial Termination of a 401(k) Plan: Even without an intent on the part of the employer, significant decreases in plan participation as a result of layoffs, reorganizations, or amendments limiting plan eligibility may lead to a partial plan termination requiring full vesting of affected participants. Failure to recognize the occurrence of a partial plan termination may result in fiduciary exposure and qualification problems for the plan.
- Company Stock in a 401(k) Plan: Risks associated with plan investments in employer stock can be exacerbated in a down economic environment. Plan fiduciaries may have to disclose certain information to participants or decide whether to discontinue the plan’s investment in company stock.
- Freezing plan participating and benefit accruals: Freezing a pension plan requires employers to carefully navigate anti-cutback rules and participant notice requirements.
- Terminating a Pension Plan: Pension plans generally must be fully funded before they may be terminated. And the involvement of the PBGC—the government insurer of private pension plans—adds additional complexity to the termination process.
- PBGC Reportable Events: Pension plans are required to notify the PBGC of certain events that indicate a pension plan or employer may be in severe financial distress.
- Withdrawal from Multiemployer (or Union) Pension Plan: Multiemployer pension plans have increasingly faced funding challenges, which may be exacerbated by a difficult economic environment. Certain employer actions may result in a withdrawal from the plan and trigger liability for the employer’s proportionate share of the plan’s unfunded vested liabilities.
Health and Welfare Plans
- Health Plan Contributions and Unpaid Claims: Employers in extreme financial distress may be tempted to view obligations under health and welfare plans as those of a creditor but doing so may cause fiduciary exposure and trigger costly prohibited transactions.
- COBRA Obligations Resulting from a Reduction in Force: COBRA requires the continuation of coverage for a limited time under group health plans for most employers upon certain qualifying events.
- Terminating a Health and Welfare Plan: While an employer generally may terminate a health or welfare plan, such action may be a recipe for significant tax penalties arising from the employer’s failure to offer group medical coverage to its full-time employees and their children.
Many employers inadvertently create ERISA plans when providing former employees severance payments payable over time under an administrative scheme. If the severance plan is an ERISA plan, there are additional legal requirements that must be met, including annual Form 5500 filings. Plan counsel should be consulted to determine whether severance benefits are not subject to ERISA.
Over the coming months, the series will dive deeper into these and other possible decisions precipitated by an economic downturn. Each blog will identify lessons learned and opportunities for strategic employer cost-savings and provide employers with a road map to navigate associated legal risks and obstacles. Winter is coming, but we can help plan sponsors be better prepared for these uncertain economic times.