Employers who have laid off employees during the past couple of years may now find themselves in a situation where they want to rehire some of those employees as the economy turns around. Before rehiring, employers will need to review a number of benefits issues to ensure compliance with separation agreements, employee handbooks and Internal Revenue Codes, just to name a few. Some of the issues to consider when rehiring employees are:
Retirement Plans - If an employee previously participated in your company’s retirement plan, and was laid off and then rehired, chances are the employee will be immediately eligible to enter the retirement plan upon his/her return (on the next plan entry date). Prior service will count towards any vesting requirements. While the Internal Revenue Code allows employers to disregard prior service when the break in service is longer than the period worked or is longer than 5 years, whichever is greater, many employers simply reinstate all prior service when individuals are rehired. If the employee received a distribution of benefits following a separation from service, the employee may be entitled to return the distribution to his/her account in order to reinstate any amount that was previously forfeited, such as the unvested amount of a company match that was forfeited at termination. If the employee does not return the distribution, prior unvested company match contributions do not need to be restored.
Health & Welfare Plans - Some companies provide for coverage under their health and welfare plans as of the first day, so this is a non-issue. For other companies that have a waiting period before coverage begins, rehired employees typically must satisfy the eligibility requirements for any medical, dental, prescription, vision, disability or other plans, unless these plans have an amendment or rider that provides for immediate coverage upon rehire.
Section 125 Flexible Benefits Plans - Plan documents for Section 125 plans should specify whether the employee’s prior pre-tax elections will be automatically reinstated or whether the employee may make new elections.
Severance Benefits - Some employees may still be receiving severance benefits when the opportunity for rehire arises. To prevent employees from receiving two paychecks from the company at one time - one for severance and one for salary - employers should include a clause in individual severance agreements stating that severance benefits will cease should the employee be rehired during the severance period.
Paid Time Off - There is no legal obligation under federal law to reinstate employees with the same paid time off accrual that they had prior to termination. The company’s Employee Handbook should clearly state how paid time off will be treated upon rehire. Employers may want to provide that all rehired individuals are treated as new employees for purposes of accruing paid time off, but this might not be the best course of action if former employees are desired based on their knowledge and experience. Another option is to provide that employees who are rehired within a certain period of time, i.e., one or two years, will be reinstated at the same paid time off accrual level, but anyone rehired after a longer break in service will begin again at the new hire accrual rate upon rehire.