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Company Retirement Plans May Be Affected By Furloughs And Layoffs

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The coronavirus pandemic has forced many employers to implement some form of workforce reduction to continue operating. While furloughs and layoffs have a significant and immediate impact on a company’s operations, plan sponsors also need to understand the longer-term effects workforce reductions have on participants’ benefits and retirement accounts.
 
Over the next several months, employers should be mindful of their ongoing obligations and responsibilities as benefit plan sponsors.

Furloughs vs. Layoffs

First, it’s important to understand the varying impacts of a furlough versus a layoff. A furloughed employee (one who is considered on unpaid temporary leave of service, with the expectation that they will eventually return to work) may continue to receive some or all of their benefits during their time away, including healthcare and retirement benefits. However, because furloughed employees aren’t receiving a paycheck, they won’t continue to contribute to their 401(k). Employers may decide to make non-elective plan contributions for furloughed employees — although many companies may find this difficult to do considering the current economic uncertainty.  
 
By contrast, laid-off (terminated) employees who are no longer part of the company are not considered active members of a company’s retirement plan and therefore are unable to contribute to it. In general, laid-off employees can leave their 401(k) assets in the plan, cash out, or roll assets into another plan or individual retirement account (IRA).
 

Loans and Withdrawals During a Furlough

Plan sponsors should first reference their plan document to understand what existing guidelines they have in place regarding employment status and loans and withdrawals. If the plan allows in-service loans and withdrawals, these options may be available to furloughed employees who meet the plan’s qualifications. The Coronavirus Aid, Relief, and Economic Security (CARES) Act gives employers the ability to allow qualifying participants (including furloughed employees) access to the lesser of $100,000 or 100 percent of their vested account balance. As always, plan documents can be amended to change the way loans operate.
 

Loan Repayments for Furloughed Employees

The CARES Act allows – but does not require – employers to extend current qualified plan loan repayments by up to 12 months; this provision applies to loans to furloughed employees, as well.
 
Depending upon the terms of each plan, employees whose loans aren’t related to the virus may be required to repay their loans sooner if they are laid off. In addition, if the loan isn’t paid back on time, the participant’s loan balance will be considered in default and will become a taxable distribution.
 

Vesting Issues for Furloughed Employees

Some plans have vesting requirements that employees need to reach to have complete ownership of company matching contributions. Employers can define vesting in various ways, including based on a specific duration of time of employment or hours of service; however the maximum timeframe to vest is six years of full-time service.
 
A furlough may affect an employee’s vesting schedule as well. For plans that base vesting on hours of service, furloughed employees aren’t able to make progress toward such thresholds during a furlough because they are no longer working. For example, employees who need to have 1,000 hours of service to get to the next vesting level might not achieve that goal in 2020, depending on the length of the furlough. On the other hand, a duration of time vesting requirement isn’t affected by furloughs because these requirements are tied to when the employee starts and stops employment; the furlough time period counts toward this service requirement.
 

Insight: Plan Ahead and Communicate

 Plan sponsors whose organizations leveraged furloughs or layoffs to help stabilize from an immediate cashflow perspective need to understand the implications of these decisions to ensure that the company meets its obligations to plan participants.
 
Clear and timely communication with plan participants is very important in this environment. Employers should be proactive in ensuring that they can reach employees on a consistent basis; this includes confirming that they have proper contact information for employees on file before and during reductions in force. Employers should also work with service providers to understand how they may help in tracking and communicating with plan participants.
 
Plan sponsors should consult with their plan advisors and benefits professionals to understand the retirement plan implications of furloughs and layoffs and meet obligations to employees after these weighty decisions are made.

High-Income Individuals Income Tax Return Examinations To Begin July 15

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On May 29, 2020, the Treasury Inspector General for Tax Administration (TIGTA) issued an audit report titled “High-Income Nonfilers Owing Billions of Dollars Are Not Being Worked by the Internal Revenue Service”. The report focused on high-income nonfilers and the IRS’ nonfiler strategy.  For tax years 2014 through 2016, there were 879,415 high-income nonfilers with an estimated tax due of $45.7 billion. From this group, more than one-third of cases have not been selected by the IRS for an assessment.  The report indicated that the IRS has experienced decreased resources, which is likely a contributing factor in untouched cases. 

The TIGTA audit report issued seven recommendations that the IRS has agreed, partially agreed, or disagreed to:

  • Agreement:
    • Prioritize non-filers to ensure delinquency notices are issued to all high-income nonfilers.
    • Implement controls to ensure that high-income nonfilers are not shelved.
  • Partial Agreement
    • Reallocate resources to ensure that most, if not all, high-income nonfilers are subject to enforcement action.
    • Analyze the population of high-income nonfilers for tax years 2014-2016 and issue notices.
    • Reconsider working multiple tax year cases for all high-income nonfilers.
    • Implement controls that will assist to identify and prioritize high-income nonfilers who are repeat offenders.
  • Disagreement
    • Designate a senior management official with appropriate resources and specific non-filer duties to address nonfiling, including high-income taxpayers and repeat nonfilers.

In response to the TIGTA report, a spokesperson for the IRS announced that their Global High Wealth Industry Group (a specialized group within the Large Business and International Division) will initiate several hundred return examinations of high-income individuals, starting between July 15 and September 30 of 2020. The Global High Wealth group analyzes the whole financial picture of high-income individuals. The examination process includes not only the taxpayer’s individual return but also any related pass-through entities with a heightened focus on partnerships. When examining the pass-through returns, there will be an emphasis on ensuring the taxpayer is in compliance with the new tax laws of the 2017 tax reform legislation known as the Tax Cuts and Jobs Act. Additionally, there will be a renewed focus on the examinations of private foundations.

2020 Private Equity Tax Strategy Considerations

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Key strategies for maintaining a strong offensive tax position during times of economic distress, particularly during the current COVID-19 pandemic, include finding money, preserving cash and planning for future success.

While the affiliation rules associated with the Paycheck Protection Program (PPP) precluded many private equity-backed portfolio companies from qualifying for PPP loans, it is possible to find money through three simple tax actions. First, businesses can now carry back net operating losses for five years, meaning that tax losses from 2018, 2019 and 2020 can be used to offset income from the prior five years for a quick cash refund. Second, businesses with any remaining alternative minimum tax (AMT) credits can also get a quick refund by electing to make all such credits refundable for 2018. Finally, businesses can get a tax credit of up to $5,000 per employee for employees kept on payroll during the pandemic, even if those employees are providing partial services for their compensation.

There are several ways to preserve cash at the moment, starting with deferring tax payments. Businesses can now defer employer payroll taxes otherwise payable for the period from March 27, 2020, through December 31, 2020. Half of the amount can be deferred until December 31, 2021, and the other half until December 31, 2022. Employers that received PPP loans can only defer payroll payments until the loans are forgiven, except that amounts deferred before the loans are forgiven can be deferred 50/50 until December 31, 2021 and 2022. In addition, payment (not just filing) of 2019 taxes can be deferred until July 15, 2020.

On top of these deferrals, 2019 and 2020 taxes can be reduced by taking a higher interest expense deduction than was previously allowed. Under the Tax Cuts and Jobs Act of 2017, businesses could only deduct interest expense up to 30% of adjusted taxable income (ATI), a computation that is similar to EBITDA but may differ in some important respects. For 2019 and 2020, the deductible amount has been increased to up to 50% of ATI. Not only that, 2019 ATI can be used to calculate 2020 interest expense deduction. Finally, businesses can take 100% bonus depreciation on qualified improvement property, a defined term that generally combines three previously separate categories (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property).

To plan for future success, we recommend businesses use this time to focus on setting an action plan. Businesses should review any diligence reports from the last 12 to 24 months, address any material issues and review acquisition documents to confirm receipt of any benefits to which they’re entitled (e.g., any net operating loss carryback opportunities).

Businesses should also take this time to consult with tax advisors about state income tax credits and business incentives reviews, as well as consider a reverse sales tax audit to see if a refund of overpaid use taxes is available. In addition, this is a good time to make sure sales tax is being filed properly, especially given numerous changes to sales taxes (with some jurisdictions even taxing services) as well as the Wayfair decision, which permitted states to expand sales tax filing obligations to an economic rather than a physical basis. Sales taxes are generally accepted as a customer tax, unless the business is audited, in which case the business pays.

Although not really a tax, a reverse unclaimed property audit may also be considered. With tax revenues plummeting, states will likely be looking for sources of additional revenue and unclaimed property may be low hanging fruit. This is especially true for businesses incorporated in Delaware, an aggressive state when it comes to unclaimed property.

The government has been providing tax as well as financial aid at a ferocious pace, including additional guidance and expanded (and sometimes nuanced) benefits. While we have outlined some of the bigger benefits currently available, businesses should consult with their tax advisors about these and other tax opportunities.