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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

The same issue applies to profit-sharing plans, which often provide that an employee receives a benefit for a particular year if he or she reaches a certain hour requirement (usually the same 1,000- hour requirement).

Employer matches, nondiscrimination rules. Another issue with 401 (k) plans and profit-sharing plans is the employer match, Greta Cowart, a partner in the Dallas office of Haynes and Boone, told us. “If you don’t have compensation for working, you can’t have a salary deferral election, then there won’t be the match and there wouldn’t bea profit sharing contribution,” she said.

Regarding plan requirements, any time an employer changes a match, the employer has to look at plan documents, Cowart said.

To compensate for a reduction in salary, employees can increase their contribution levels, if the plan allows it, said Scott Macey, senior vice president and director of government affairs at Aon Consulting in Washington, D.C.

However, companies should be careful that the increased contributions do not skew anti-discrimination testing, Macey said. 40 1 (k) nondiscrimination rules prohibit highly compensated employees (HCEs) from deferring too great a percentage of their salary compared to nonhighly compensated employees (NHCEs). In a furlough situation, HCEs might be the only employees able to increase contributions. In the meantime, NHCEs on furlough might have to reduce or stop their contributions. As a result, the percentages might shift, causing a company to fail the anti- discrimination testing.

If this is the case, a company can cut back the amount the HCEs can contribute for the rest of the year, Macey said. If, at the end of the year, the HCEs have contributed too much money, the company would have to give that money back to the HCEs, and that money would become taxable as income, he added. This situation could occur in a small plan, or a large plan with a significant number of HCEs, Macey said.

40 1 (k) plan loan repayments could also be affected, Cowart said. Loans from 40 1 (k) plans are usually paid through salary reductions. If there is no salary to take the repayment from, the employee has to write a check, because otherwise he or she could go into default, Cowart said. Even if there is still a salary, but it is less because of reduced hours, the employee still has to pay back the same amount, she said. This means less money in the employee’s paycheck, Cowart said. Finally, if the employee misses a payment one quarter and does not make up the payment by the end of the following quarter, the loan would be deemed distributed, and the entire amount of the loan would be taxable to the employee on Form 1099, she warned.

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