Among the longer-term considerations for employer layoff and furlough decisions is the impact on a single employer pension, profit sharing, or 401(k) plan.
In general, a 401(k) plan can sustain a partial termination when 20% of the participants in a given year are involuntarily terminated. 26 U.S.C. §411(d); Rev. Proc. 2007-43. Partial termination is a facts-and-circumstances analysis. For example, if an employer typically experiences employee turnover in excess of 20% per year, such routine turnover may not trigger a partial termination. When a partial termination occurs, all benefits vest. Invariably, these benefits are employer contributions, because employee contributions are always fully vested. That may or may not have a significant impact on the employer, and every situation can be different. Employers who partially terminate a 401(k) plan must identify the plan participants who require an acceleration of vesting. Employers may owe additional benefits to plan participants who improperly suffer a forfeiture.
Employers in multiemployer plans have further concerns, because partial termination triggers withdrawal liability. A partial withdrawal occurs when a contributing employer has not entirely withdrawn from a multiemployer plan, but there has been a long-term decline in the employer’s contributions. Unlike 401(k) plans, partial withdrawals from multiemployer plans are determined formulaically pursuant to 29 U.S.C. §1385. Generally, the partial withdrawal occurs when there is a 70% or greater decline in employer contribution base units (CBU) or when there is a partial cessation of the employer’s contribution obligations, such as under a collective bargaining agreement. CBUs are not monetary units but rather the basis on which contributions are made. Where contributions are set on the basis of dollars per hour, the hour is the CBU. The reduction is calculated by an involved formula in which the employer’s CBUs over the current and two prior plan years are compared to the two highest CBUs over the prior five years. The partial withdrawal occurs if each of the three testing years’ CBUs are not more than 30% of the highest base year. Special rules govern withdrawal determinations in the building and construction, retail foods, entertainment, and trucking industries, among others.
Calculating the amount of the withdrawal liability is based on one of four statutory formulas adopted by the multiemployer plan’s trustees and applicable to all employers contributing to the plan. In some circumstances, plan trustees can adopt a different formula, subject to Pension Benefit Guaranty Corporation, a federal agency, approval. Although a full explanation of the various formulas is beyond the scope of this post, each formula assesses the withdrawing employer’s allocated share of the plan’s unfunded vested benefits, as of the last day of the plan year prior to the withdrawal. The amount can vary based on a number of factors, including the date that the plan’s assets and liabilities are valued, the actuarial methods used to value the assets and liabilities, and the formula selected by the trustees.
In the current environment, whether a 70% decline will result is an issue of timing and how the recovery is implemented.
As indicated, the facts and circumstances of each individual situation will be critical and should be reviewed with counsel as part of the process of analyzing risk factors in any layoff or furlough determination.