Benefits Briefs in the Time of COVID-19, Part 7: What Do Layoffs, Leaves, and Furloughs Mean for Retirement Plans?

The COVID-19 pandemic has employers strategizing on how to retain valuable employees while addressing declines in demand for the company’s products or services.  Some employers have placed employees on unpaid leave status instead of terminating the employee’s service.  Employers may call this unpaid leave a layoff or a furlough.  This benefits brief describes how the employee’s unpaid status may affect retirement plan administration and the employees’ benefits.


With no compensation being paid to the employee, his or her 401(k) salary deferrals will cease. This decrease in employee deferrals may impact a 401(k) plan’s ability to pass the ADP and ACP tests, thereby increasing the possibility that salary deferrals will need to be returned to highly compensated employees. This could be particularly problematic if non-highly compensated employees are placed on unpaid leave while highly compensated employees continue to work and receive compensation.

In addition, for plans that impose an hours of service requirement that must be met during the plan year for the employee to be eligible for the employer’s match or profit sharing contribution, a lengthy period of unpaid leave may result in the employee being ineligible for that contribution.  Employers that are concerned about this issue could amend their plan to reduce or eliminate the hours of service requirement for this year.


Retirement plans use either the elapsed time or the hours of service method to calculate an employee’s vesting service.  Under the elapsed time method, the period between an employee’s date of hire and date of termination determines if the employee has completed the requisite service to be fully vested in his or her account.  Since this method does not look at whether the employee was paid during the period of employment, an unpaid layoff or furlough may have little impact on the employee’s accrual of vesting service in a plan that uses the elapsed time method.

Under the hours of service method, only hours for which an employee is paid count towards vesting service.  Most plans that use this method require an employee to complete 1,000 hours of service during a plan year to earn a year of service.  If the period of unpaid leave is extensive, the employee may not have sufficient hours of service to earn a year of vesting service in the current plan year.


Employees on layoff or furlough have the same distribution options that would be available to them if they were actively at work.  Such distribution options could include an in-service distribution if the employee has attained age 59 ½ or a hardship distribution if the employee has a hardship that meets the plan’s requirements.  In addition, the employee may be eligible for a “coronavirus related distribution” if the employer has adopted this provision of the CARES Act, which is explained in detail here.


Most retirement plans require loan payments to be withheld from an employee’s pay, and do not have processes to accept direct payments from an employee.  When the employee is on an unpaid leave, loan payments will be missed.  Employers will want to monitor the missed payments to ensure that they fall within the repayment exception that applies when an employee is on an unpaid leave of absence, or that they comply with the CARES Act rules, if adopted by the employer.  When the employee returns to work, the employee will need to catch up his or her missed payments in accordance with the plan’s loan policy.

Whether an employee who is on an unpaid leave is eligible for a plan loan will depend on whether the plan’s loan policy restricts loans to participants who are receiving pay from the employer from which loan payments can be withheld.

Unpaid layoffs, leaves and furloughs raise a number of plan administration questions that can be answered only by reviewing the terms of the retirement plan with an experienced benefits attorney.

This post is a part of the All Things HR Blog’s multi-part series on frequent issues and questions faced by employers during the COVID-19 crisis.

Read Part 1: Federal Agencies Relax Summary of Benefits and Coverage (“SBC”) Disclosure Deadlines

Read Part 2: Temporary Expansion of Educational Assistance Programs to Cover Employees’ Student Loan Debt

Read Part 3: Layoffs/Furloughs and Excise Taxes under the Affordable Care Act

Read Part 4: Reimbursement of Over-the-Counter Medications

Read Part 5: Suspending or Reducing 401(k) Safe Harbor Contributions

Read Part 6: Special Considerations for Mid-Year Changes to Cafeteria Plan Elections

About the Author

Deborah L. Grace is a Member in Dickinson Wright’s Troy office where she advises HR professionals, CFOs, and private equity firms on all matters relating to employee benefits law, including designing and administering 401(k) retirement plans and welfare benefit plans.  Deb can be reached at 248-433-7217 or and you can visit her bio here.