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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

According to Friedman, “employers are coming to grips first with the idea of saving money by furloughing employees, and then asking their management how to treat people on furloughs.” He said companies are trying to avoid implementing leave programs that affect employees’ benefits. For example, some employers are considering that for the purpose of furloughs, the employees would remain active for plan eligibility purposes, he said. There may be very different factors that need to be addressed with respect to retirement plans and health benefit plans in achieving this goal, Friedman added.

Eligibility for 40 1 (k) participation. Under a 40 1 (k) plan, once employees become eligible to participate, they often will remain eligible regardless of whether their employee status changes. The 401(k) plan can require that an employee work for one year before becoming eligible to participate in the plan, and the tax code permits employers to define one year as 1 ,000 hours of service (although many plans now allow im- mediate participation). The 1,000- hour threshold is easy to meet for full-time workers, but it may affect part-time workers.

However, new employees who are put on furlough could see an impact on their eligibility to participate in the plan or to receive matching contributions from the employer, Friedman said.

If a furlough affects an employee’s hours to the extent that he or she doesn’t meet the 1,000-hour requirement, that employee might have to wait until the next eligibility period to begin participating in the plan (or to be eligible for certain types of plan contributions), Friedman said. However, employers maybe able to amend the plan to provide that the furlough period is considered a period of active employment, alleviating the negative effect on the plan benefit for furloughed employees.

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