Into the Mystic . . . Employee Benefit Considerations for Returning Workers

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by Kevin Selzer

Many employers are venturing into uncharted waters as significant numbers of employees are being rehired or returning from extended leaves of absence (e.g., furloughed employees). In this environment, it can be easy to overlook the employee benefit plan implications of this workforce shift. Below are some best practices for employers faced with employees returning to work.

Ensure that retirement plans are crediting service for returning employees correctly. In most cases, employers will not be able to treat a rehired employee as a new employee for retirement plan purposes. This means that the employer will have to consider the employee’s prior service for purposes of determining proper eligibility and vesting credit. This is a good time for employers to check and confirm that any systems that track service (e.g., payroll systems and the retirement plan administrator’s systems) are configured correctly to credit prior service.

In working through the service crediting issues, employers should be aware of the following rules:

  • Elapsed time. Periods of absence of less than one-year are disregarded for plans using the elapsed time method of crediting service (i.e., for plan purposes, the rehire is treated as if they continued working during the period of absence).
  • Hours of service. Employees may need to be credited with hours of service (under the hours of service method of crediting service) for the “non-performance” of duties. This includes crediting hours for vacation/sick leave cash outs (even if paid after termination of employment) or pay that furloughed employees received while on leave.
  • Caution about participation timing. If an employee satisfied plan eligibility rules prior to termination, then generally, the rehire must reenter the retirement plan immediately. This means that in 401(k) plans, for example, the rehire need to be permitted to defer right away. Failure to allow the rehired employee to participate in the plan at the correct time could cost the employer in terms of corrective contributions and potential IRS sanctions. We anticipate that IRS audits of 2020 plan years will be looking closely at service crediting.

Service credit calculations may also matter for determining whether an employee is entitled to receive an employer contribution for the current plan year.

Review retirement plan operation during the past several months. Many employers have been understaffed and stretched thin during the rise of COVID, which could lead to unintended operational plan errors. In addition to reviewing service crediting as mentioned above, consider performing a mini-compliance review in the following areas:

  • remittance timing for employee contributions (note there is some limited relief for late deposits under EBSA Disaster Relief 2020-01);
  • partial plan termination rules and the use of forfeitures;
  • provision of required notices; and
  • plan distributions to rehired employees.

Ensure that rehired employees are eligible to participate in health and welfare plans at the proper time. Plan documents control when a rehired employee is eligible to participate in these plans. However, many plan documents do not address rehire participation timing or are ambiguous, forcing employers to interpret the plan and/or establish a new procedure for rehired employees. Employers should also consider whether the timing of the offer of coverage could trigger an employer shared responsibility tax under the Affordance Care Act (ACA). As a reminder, those provisions of the ACA contain break in service rules that control whether a rehire is treated as a continuing employee (and needs to be offered coverage quickly) or a new hire for ACA purposes.

Consider whether rehired employees and/or employees returning from a leave of absence may change health and welfare elections. Employers should consult cafeteria plan documents to guide permissible health and welfare election changes. Various COVID-related relief may also apply. Please keep in mind that cafeteria plan rules generally provide that an employee rehired within 30 days may not change his or her elections – subject to the mid-year change rules and COVID-related relief.

Confirm that systems will report periods of absence correctly for purposes of Form 1094/1095 reporting (to the extent applicable). As many employers know, ACA reporting, particularly, the reporting codes on Form 1095-C, is complex. Employers with a significant number of rehired employees or furloughed employees would be wise to confirm that these periods of absence are reported correctly.