We recognize that your organization is undertaking some difficult decisions regarding your workforce and benefits. Curcio Webb has been evaluating how COVID-19 could potentially impact your employee benefits and administration. We are sharing some thoughts around the impact to health and welfare and retirement plan administration. We are available to discuss the implications to your organization as not all items apply to every plan sponsor. We recommend discussing any changes with your ERISA counsel prior to implementation.
Health and Welfare
Dependent Care Flexible Spending Accounts
Many organizations allow employees to contribute to a Dependent Care Flexible Spending Account. Many employees will not need these dollars as child care facilities are closed, employees are working from home and can provide this care, or family members have lost income and the employee is not able to make contributions. While the reality of the current situation may not be classified as a “life event”, some employers are interpreting the current situation as such. Employers may consider allowing employees to stop contributions and provide permission to administration providers to accept dependent care contribution changes.
Employee Layoffs & Furloughs
We expect many of our clients will need to lay off or furlough employees. This will increase the number of participants on COBRA. Many health and welfare administration contracts are structured where the provider 1) charges per COBRA enrollment kit, or 2) charges a higher fee for COBRA participants over active participants. Employers may look for relief from these added fees as this could be a substantial unexpected cost. Also, if an employer is planning to subsidize COBRA coverage for laid-off or furloughed employees, we suggest reaching out to your administration provider as soon as possible. Some arrangements may take time to set up and you’ll need to confirm how you will identify affected employees.
Some organizations are considering placing employees on unpaid leave instead of laying them off in order to continue providing active benefits (with some employer subsidy rather than making employees pay 102% of premiums for COBRA). This may trigger direct billing of premiums to these participants which typically adds cost under the H&W administration contract. Employers may want to consider placing these employees in deduction arrears – and allow employees to make-up the employee cost at a later time.
Working from Home
Administration providers are already feeling the pressure of their employees working from home. This will likely have a trickle down impact on annual enrollment planning and potentially providers’ ability to staff additional annual enrollment customer service. Also, your ability to manage annual enrollment activities is likely compromised due to other priorities. We recommend conversations with your provider on realistic annual enrollment schedules and expectations. In addition, consider making few changes for 2021.
Temporary Salary Reductions
Some of our clients are considering temporary salary reductions for specific populations. If your organization considers this, be sure to identify exactly how salary data will go from your organization to your administration provider, and how life insurance and disability coverage (and other salary-based benefits) should be calculated during the temporary reduction period.
- The impact of laying off, furloughing employees, or placing them on unpaid leave has a potential significant impact to 401(k) plans. If employees are no longer “active”, they may not have access to loans. Plan sponsors may need to review their loan eligibility requirements.
- The “coronavirus-related distribution” is a new distribution type that is available to active and inactive employees. We suspect many recordkeepers will not be able to set up the new distribution type very quickly, and will leverage hardship withdrawal functionality. Since hardships are considered an “in-service withdrawal”, the standard recordkeeper functionality may limit access to populations. Plan sponsors should confirm accurate setup of this distribution with their provider.
- Many organizations have loan initiation fees (typically $50-$100). Some organizations are also charge a hardship approval or hardship/distribution processing fees (often $25-$50). Given that many employees may require cash, employers may want to consider waiving loan and distribution fees. The added loan and distribution volume will ultimately add revenue to the 401(k) providers. We expect providers will partner with clients that want to institute this change (as providers should not be profiting from the added volumes).
- The new regulations stipulate a suspension of loan payments for one year for qualified individuals. Some recordkeeper arrangements require participants to pay loan maintenance fees. Organizations should confirm that their provider is waiving these fees in light of no loan repayment processing and extension of the loan terms.
- Many plans do not have a partial distribution option in their 401(k) plan. Terminated employees that have left their money would be forced to take the one-time “coronavirus-related distribution” or a total distribution to get access to money. Plan sponsors may want to consider amending their plan to allow for partial distributions.
- The “coronavirus-related distribution” appears to have minimal documentation requirements (i.e. employee self-certification) as opposed to standard hardship withdrawals where employees provide proof of need. Cyberthieves may see this as an opportunity to fraudulently access employee accounts for money. We recommend conversations with your 401(k) providers around data security: How will withdrawal verifications be performed? Will wait periods on changes to banking information be enforced or waived? For employees who have forgotten their PINs/passwords, what security will be performed to ensure employee identity (as we suspect you will not make employees wait for a new PIN in the mail)?
- Similar to the point above on population salary reductions, many plans provide a fixed retirement contribution based on pay. Plan sponsors should be considering the potential impact to these contributions (data to the provider, are contribution reductions intended, etc.).
As a side note, many administration providers offshore portions of benefits administration to India. In light of India requiring work-at-home arrangements, data security of anything processed in India needs consideration as the standard data oversight in offices is no longer applicable. We recommend employers have conversations with their providers on how they will ensure data protection in their offshored locations.
We hope you find these thoughts useful. As we continue to have conversations with clients on their issues and think of other benefit implications, we will be sharing. We recognize that many of these items require conversations with your providers. Please reach out if you would like assistance with any of these discussions.