Benefit professionals need to be very careful about how they respond to the partial government shutdown.

Potential areas of concern include, but are not limited to, the following:

1. Eligibility and Vesting Service for Retirement Plans

Employees who are temporarily laid off are typically not credited with service for purposes of benefit plan eligibility and vesting while on leave. Employees who experience a cutback in hours may also be impacted if their hours fall below a specific threshold (e.g., 1,000 hours for vesting service). If the leave extends for a significant period of time, employees could experience a break in service that could negate any prior service accumulated for eligibility and vesting.

2. Employee Elective Contributions

While on leave, employees are not in pay status and, therefore, elective contributions to 401k plans and cafeteria plans cannot be made. When employees return to pay status, their elective contributions may be adjusted so that the employee will get the annual total that he/she had elected prior to being laid off. On the other hand, when employees return from leave they may not be able to afford increased deductions per pay period to get the annual total. In some cases, the employees may need to decrease their elections.

NOTE: Employees on leave (or whose spouses are on leave) due to a layoff may not be reimbursed for dependent care expenses during the leave period.

3. Nondiscrimination Testing

A temporary or permanent layoff or a cutback in hours affecting a number of employees can have an impact on nondiscrimination testing. For example, if a significant portion of the laid-off employees are non-highly compensated, it might be harder to pass the 401k average deferral percentage (ADP) test limiting the amount that highly compensated employees may contribute to the 401k plan. If a 401k plan fails the ADP test, the amounts contributed by highly compensated employees may have to be reduced.

4. Hardship Distributions

Employers may see an increase in the number of requests for hardship distributions. Neither an employee’s layoff or reduction in hours, nor a spouse’s layoff or hours reduction is a safe-harbor reason for a hardship withdrawal. An employee experiencing an “immediate and heavy financial need,” however, may be permitted to take a hardship distribution.  Certain financial circumstances that an employee may experience as a result of the government shutdown (such as the need to prevent eviction from or foreclosure on a principal residence, or to pay medical expenses or educational expenses) may qualify as a safe-harbor reason for permitting a hardship distribution.

5. Health Plan Eligibility

Employees who are laid off or experience a reduction in hours resulting in loss of health plan coverage must be offered COBRA continuation coverage. Some employees who experience a reduction in hours but do not lose group health coverage may need to drop the coverage if it is now too expensive. Employees who are laid off and who do not lose health coverage may need to pay their share of the health insurance premium with after-tax dollars.

Employers may also see an increase in the number of changes to employees’ health plan elections if their spouse or child loses health coverage due to a layoff or reduction in hours. The employee may elect to enroll his/her family in the group health plan or add family members to the group health plan.

6. Pension Plan Distributions

During the government shutdown, IRS is not publishing the monthly “applicable interest rate” used in calculating lump sum payments from certain pension plans.

NOTE: Employers should carefully review government contracts and union contracts prior to a temporary layoff or reduction in hours to determine its obligations, if any, with respect to its benefit plans during a government shutdown or temporary layoff.

Employers affected by the partial government shutdown should monitor their benefit plans carefully to determine what impact, if any, it is having on their plans and on employees. Solutions may range from permanent plan design changes to temporary fixes.

Since 1996, The Wagner Law Group has provided a practical approach and sophisticated legal solutions while offering the personalized attention of a boutique law firm. Our practice areas include: ERISA Law, Investment Management Law, Employment Law, Labor and Human Resources, Employee Benefits, Welfare Benefits, Privacy & Security, Corporate Law, Tax, Estate Planning and Administration, Real Estate and Litigation. Marcia Wagner can be reached at marcia@wagnerlawgroup.com.