Employee Benefits – Options When Business Slows/Shuts Down

Since the spread of the Novel Coronavirus (COVID-19), Americans have, whether voluntarily or by government order, stayed home.  The result has been a loss of customers for retail and food service and a loss of employees for all varieties of businesses, often resulting in a “layoff,” which can be a termination of the employees’ employment, or a “furlough,” which is an unpaid leave of absence while remaining employed. As employers deal with employee absences and workforce cutbacks, they must manage their employee benefits plans and programs to avoid unintended consequences.

Health Plans

Health Plans are a major contributor to employment costs for many employers and may be an attractive area to cut costs; however, changes must be tailored to conform to the requirements of the Affordable Care Act (“ACA”). For large employers, any increase in the employee share of premiums must be calculated to remain below the ACA affordability limit.  In addition, any midyear changes in plan benefits may be made only after providing at least sixty days advance notice to participants. Failure to comply with either of these requirements may expose the employer to significant penalties.

Employees whose employment has been terminated will, in most cases, be eligible for COBRA (or state equivalent) continuation coverage.  The failure to timely provide COBRA notices will expose the employer to potentially significant penalties and, in certain cases, liability for claims incurred.  The treatment of full-time employees who are furloughed or placed on a leave of absence (voluntarily or involuntarily), however, is more complicated. So long as they remain employees on the records of the company, these employees retain their status as full-time employees.  As such, terminating active employee health insurance coverage or increasing the employee premium may result in penalties under the ACA. The IRS, however, has provided a procedure by which the employer may transition these employees to part-time status for health insurance purposes.  Employers should consult with their insurance advisors and/or attorneys in determining their insurance contract’s restrictions on the coverage of employees not actively at work and the potential to transition these employees to a part-time status. For employees terminated and rehired after a break of less than thirteen weeks, they will be eligible for coverage immediately upon rehire, rather than being treated as new employees.

Cafeteria Plan

Cafeteria plan benefits are often overlooked in connection with the termination of employment or change in benefits.  Employers should carefully consider participants’ right to change cafeteria plan elections following a change in their own or a spouse’s medical benefits.  Further, upon a termination of employment, a flexible spending account (FSA) participant has special COBRA rights for the remainder of the plan year if the employee’s claims submitted as of the termination date are less than the amounts contributed to the plan by the employee as of such date.  This may result in an adverse selection, as participants may elect COBRA, pay a single monthly premium and utilize the entire remaining FSA benefit in one month.

Retirement Plans

Employers looking to reduce costs may consider changes to their retirement plans, including suspending profit sharing and 401(k) matching contributions, freezing defined benefit pensions, or terminating plans altogether.  Any changes should be implemented only after consulting a benefits attorney and/or a pension consultant to assure compliance with both the pension laws and the non-discrimination requirements.

Discretionary profit sharing and matching contributions may be suspended at any time. If the profit sharing or matching contribution is not discretionary under the terms of the plan document, however, the plan must be amended to remove the mandatory contributions prior to suspending such contributions.  Finally, if the plan is a safe-harbor 401(k), the safe-harbor election may be terminated mid-year, so long as participants are provided 30 days advance notice of the change and an opportunity to change their deferral elections, and the plan is amended to include the ADP and ACP testing requirements.  For safe-harbor plans with an employer non-elective contribution rather than matching contribution, this change may be made only if the employer incurs a substantial business hardship.

Any change to a defined benefit plan should be taken only after consulting both an attorney and actuary.  The freeze or termination of a defined benefit plan may require additional PBGC filings, increased premiums, accelerated participant vesting and accelerated funding requirements.  The termination of a plan, whether defined benefit or defined contribution, is a drastic measure that should not be taken lightly. This will likely require plan documents be updated, government filings be made and all participant accounts be vested.  In addition, after a plan is terminated, another plan of the same type cannot be adopted for twelve months following the termination.

Finally, the availability of retirement plan accounts to participants will depend on whether they are terminated or furloughed.  A terminated employee may be permitted to take a distribution of his/her account balance (subject to income taxes and potential early withdrawal penalties).  Furloughed employees, however, have not had a separation from service and, therefore, are generally not permitted to take a distribution.


Upon termination of employment, including by layoff, the employer may be obligated to pay accrued vacation or PTO.  In Missouri, payment of such leave upon termination is not required unless the employer has agreed to do so through an offer letter, employment agreement, or employee handbook.  In a number of states including Illinois, however, employers are required to pay accrued vacation and, in some cases, PTO upon termination. Alternatively, furloughed employees are not entitled to payment of accrued vacation unless and until their employment is terminated.

Deferred Compensation Plans

The regulations regarding deferred compensation plans are rigid.  While it may be tempting to allow the acceleration of payments to employees or the termination of deferral elections for participants who have seen their income decline, such actions may expose all participants in the plan to excise taxes.  When following the proper procedures, however, plans may be terminated, allowing the distribution of deferred compensation accounts and the termination of deferral elections.


As business slows and tough decisions must be made, employee benefits may be adjusted to meet the changing demands of the company and its valued employees.  These changes, however, must be undertaken with a clear understanding of the restrictions under the law and the implications for the employer and employees.  The decision to layoff employees is difficult and the nature of the layoff as a termination or furlough may have significant impacts on the employees and the employer.

The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters for over sixty years, and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.