Amid the coronavirus pandemic, current events are reminiscent of the financial challenges of 2008. Those challenges imparted some important lessons for employers. Elliot Dinkin considers what employers did in 2008 that worked well and how they can apply takeaways to improve outcomes now.
Back in 2008, most companies took a piecemeal approach in attempting to save on cash outflow versus an overall total compensation perspective. Employers trimmed or eliminated matches to savings plans, froze retirement plans and implemented conversions of certain employer provided benefits to an employee-pay voluntary basis, and there it was: the desired savings. However, how did those actions affect long-term cost? The short answer is that medical costs continued to increase, turnover increased and frozen pension plans have been difficult to manage and are no longer of strategic interest.
Fast forward to 2020. It was only a short time ago that we were developing plans for retaining employees and considering a variety of ideas along those lines. Now, furloughs and layoffs are unfortunately inevitable. But for the remaining employees who are required to do more than before, how should we approach things differently? The status quo will no longer work.
What we saw after the 2008 fallout was certainly enlightening: The piecemeal approach did not provide longer-term rewards. If we truly want to emerge from the current COVID-19 pandemic in a better place, maybe the approach should reflect a fresh start and fresh approach. How we keep the lights on can be managed a bit differently, and some combined approach should be considered. A total compensation approach is key by creating and offering all-in packages that permit employee choices while operations continue to run smoothly.
Additionally, it is critical not to ignore risk management issues pertaining to benefits, compensation and retirement plans. Keep in mind: When things are going great, participants may ignore or not challenge certain practices. This does not happen when the market is in decline.
Consider the impact the following may produce:
It can be tempting to cut corners at this time, but this may result in longer-term costs. It is important to:
- Know who is covered
- Understand exempt and nonexempt
- Review state laws
- Display poster
- Keep records
Pay reductions, layoffs, furloughs and other strategies provide additional fuel if discriminatory pay practices continue or increase, as well as additional time for employees to take action. If you postponed a prior review, now because of time and attention, attempting to fix it will help close any ongoing risks. Pay equity considerations include:
- Which protected classes do the equal pay laws protect?
- What comparisons on types of work are required?
- What are the permissible factors to explain pay differences?
- Is reliance on geographic location to explain pay differences permitted?
- May employers ask about salary history?
Cancellation of Previously Declared Bonuses, Incentives and Raises
This is understandable from a cash-flow perspective, but may cause unintended consequences for those who remain.
401(k) Operational Issues
Attend to any operational concerns immediately for problems that previously existed or might have been overlooked to limit risks going forward. Here are some scenarios and appropriate actions:
- If you made changes to your plan document, inform everyone who services your plan of those changes and what the changes mean to your plan’s operation.
- If you amend your plan document, you should also amend your summary plan description. If you materially modify your plan, you must give a summary of the material modifications to plan participants within 210 days after the end of the plan year in which you adopted the modification.
- If you’ve changed the way you operate your plan, communicate those changes to everyone who provides service to your plan. You may need to reflect these changes to your plan document through a plan amendment.
- If you’ve changed the plan trustees, you need to convey those changes and you may need to update your plan document and summary plan description.
Any changes in the ownership interests or business acquisitions may affect the nondiscrimination testing for the plan. Convey these changes to your plan service providers.
Monitor Disability Claims
claims rise from employees who have tried to work through their health problems but now are unable to do so for a variety of reasons. Others see this as an opportunity relating to anticipating potential job losses. Operationally, via internal or external processes, existing procedures should continue without regard to any personal opinions. The best advice is to follow the claim regulations like never before. The current rules have enough traps that failure to follow the guidelines can cause traps.
Avoid Temptation to Loosen Nonqualified Plan Rules
Hardship rules exist for qualified plans but not nonqualified plans. Careful adherence to the terms of these arrangements and Section 409A is vital.
Furloughs and Layoffs
Be certain to consider legal and related issues pertaining to these arrangements to avoid discrimination claims. Failure to send out required notices (WARN, PBGC reporting, etc.) and other related requirements could present legal issues and penalties.
For employers who conducted furloughs, layoffs or perhaps reductions in work hours, consider the following:
- Review plan eligibility provisions when considering reductions in hours, extended leaves of absence, alternative work arrangements, temporary layoffs, etc. and how these changes impact employee eligibility under the plan. Employers should be careful about changing eligibility rules in response to the COVID-19 pandemic without consulting with carriers, stop-loss insurers, third-party administrators and legal counsel.
- Employees may not have a method to pay their share of benefit plan premiums through payroll deductions. There are several options to prevent termination of coverage for nonpayment, including permitting employees to pay via check or establishing a repayment schedule once operations return to normal.
- For benefits tied to compensation, consider the impact of temporary reductions in pay on benefit levels — for example, if a disability benefit is a percentage of pay or a pension plan is a percentage of final average pay.
- Employers should carefully review the terms of the vendor contracts that they have in place. It is crucial that all material provisions and terms are understood prior to implementing benefit plan changes. For example, vendor contracts may often state that if an employer reduces the number of covered lives by a certain defined percentage, the vendor may re-rate the policy.
Regardless of recent legislative activity, including the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security (CARES) Act, there are many opportunities employers can take advantage of now. This will help to achieve a positive outcome for their businesses to prosper and be better prepared in the future should we encounter such economic turmoil again.