These words are often used interchangeably when their meanings are actually different.
A furlough is a mandatory temporary leave of absence where the employee is expected to return to work. Furloughs may involve a reduction in hours or several weeks of unpaid leave during the year. A furloughed employee is typically still eligible for benefits coverage.
A layoff is generally considered a separation from employment. An employer may have reason to believe it can recall workers back to work after a layoff and may call it a temporary layoff although it can become permanent.
A termination happens when a position is eliminated with no intention of replacing it.
Why does it matter what it is called?
In retirement plans, there are several reasons why it is important. Some include the crediting of years of service for eligibility and vesting. Others include the allocation of employer contributions and coverage testing. One of the most important considerations is determining if there is a partial plan termination.
A partial plan termination happens when enough participants, typically 20% of the workforce, are terminated due to a company event. When a partial plan termination occurs, all affected participants must become 100% vested regardless of their years of service. This could be an issue with the many terminations and layoffs due to the COVID virus and how it impacted the workforce.
There is some good news. The IRS has issued some relief in the Consolidated Appropriations Act of 2021. The Act provides for a bright line test. A calendar year plan will not have a participant plan termination for the years 2020 or 2021 as long as the number of active participants on March 31, 2021 is at least 80% of the number of active participants on March 13, 2020. It looks to be designed to provide relief for employers that were forced to terminate or layoff a large percentage of employees in late March 2020 if they have rehired or replaced those employees by March 31, 2021.
The rules surrounding these issues are complex. We will be monitoring your plans for these concerns and will let you know if we need more information to determine if a partial plan termination has occurred. As always, feel free to reach out to your plan consultant if you have questions or concerns.