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Furloughs May Impact Pension, Health Care, and Fringe Benefits

Furloughs May Impact Pension, Health Care, and Fringe Benefits

IOMA's Report on Managing Benefits Plans

September 03, 2009

To deal with the economic downturn without laying off workers, some employers have instituted voluntary and involuntary unpaid leave programs. However, reduced hours or unpaid leave can have an unexpected negative effect on employee benefits, including worker eligibility for pension plans, employer matching contributions to 401(k) plans, and health care coverage. According to a report by Watson Wyatt, Effect of the Economic Crisis on HR Programs, Update: April 2009, cost-cutting methods used by surveyed employers included decreasing hours through reduced workweeks (22 percent), mandatory furloughs (17 percent), and voluntary furloughs (11 percent).

In addition, over the next 12 months, 4 percent of surveyed employers expect to continue reduced weeks, 4 percent expect to continue mandatory furloughs, and 5 percent expect to continue voluntary furloughs. The report was based on a survey of 141 U.S. companies.

Steven Friedman, shareholder and chair of the Employee Benefits and Executive Compensation Practice Group for Littler Mendelson in New York City, told us that furloughs could cause employees to lose benefits if they participate in plans with eligibility requirements stated in hours.

Pamela Perdue, of counsel at the St. Louis office of Summers Compton Wells, said that the way in which a furlough impacts benefits, “if at all, really depends upon how it’s structured, and the company’s own policies and benefit plan provisions.”

An Internal Revenue Service spokesman, meanwhile, said “the subject of unpaid leave and employee benefits is an unsettled area.”

New interest in furloughs. Perdue said it used to be that furloughs were something more often seen by state governments or the automobile in- dustry. Now, more and more private employers are looking at it as a way to avoid employee layoffs or termina- tions. For example, some employers that may have traditionally closed down during the period between Christmas and New Year’s Day, with employees continuing to receive pay, are now looking at the same practice but without pay.

Friedman said at his practice, employer clients have been expressing interest in furloughing employees, which is something that he said many benefits attorneys have never been asked about before.

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