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Retirement Plans Can’t Escape Partial Government Shutdown

Practice Management

Like water poured on the top of a hill whose reach is quick and hard to control, the stalemate in Washington is spreading beyond what’s reported on the nightly news. Add retirement plan administration to the list of everyday functions that are now feeling the impacts.

The most predictable effect, of course, is the impact on furloughed federal workers. According to a Bloomberg analysis of data from the Federal Retirement Thrift Investment Board (FRTIB), there were 34% more hardship withdrawals from retirement accounts in the 5.5 million participant federal plan in the two and a half weeks after Christmas than in the same period a year ago. The data covers a period ending Jan. 14, which was the first weekday after many of those workers did not receive a paycheck.

That is not the first such phenomenon: Kim Weaver, the spokeswoman for the federal government’s Thrift Savings Plan, reportedly told Bloomberg that during a government shutdown in October 2013, hardship withdrawals “surged.”

Federal government shutdowns do not affect retired federal workers, according to the Office of Personnel Management (OPM). “Guidance for Shutdown Furloughs,” a publication OPM prepared in September 2015, specifies that federal retirees under the CSRS and FERS retirement systems will still receive their scheduled annuity payments on the first business day of the month.

But Not Just the Feds

Some private-sector employers and employees are directly affected as well, including federal contractors. Forbes noted recently that millions of contractors also face consequences that include dipping into retirement savings. The Jackson Lewis law firm has made a similar observation, warning employers that one of the results of changing employees’ work schedules due to the partial shutdown may be receiving more applications for hardship distributions from retirement plans because of lost wages.

And the effects on private-sector employees can go farther than that. In its ERISA & Employee Benefits Law Alert, the Wagner Law Group points out that temporary layoffs can affect plan eligibility and vesting while on leave; employees hours are reduced below a certain threshold also may experience such an effect. And if a period of leave is sufficiently protracted, it could negate the applicability of prior service regarding eligibility and vesting.

“Benefit professionals need to be very careful about how they respond to the partial government shutdown,” says Wagner.

Then, of course, there’s the effect of the partial shutdown on the IRS. According to the IRS’ contingency plan, most IRS operations are closed, affecting nearly 80,000 employees. The plan says that the IRS is to retain certain excepted personnel to perform certain key functions, including activities related to emergencies or the protection of government property. But that apparently does not include at least some functions important to retirement plans.

For instance, the shutdown could affect private sector plans’ payment of pension lump sums, according to the blog of retirement plan administration and consulting firm Watkins Ross.

They explain that this is because DB plans that make lump sum payments depend on interest rates that the IRS publishes in order to be able to calculate the lump sums. But during federal government shutdowns, the IRS does not post the rates. So the lack of these figures can affect a plan’s ability to make lump sum payments, and could result in some plan participants having to receive their payments later than they ordinarily would have.

The shutdown’s effect on the IRS has also resulted in the cancellation of a scheduled public hearing concerning proposed amendments to the regulations relating to imposing user fees for enrolled agents and enrolled retirement plan agents (REG-122898-17). The IRS says that it will determine later whether the public hearing, which had been scheduled for Jan. 24, will be rescheduled.

It’s not clear what the IRS plans to do should the shutdown continue for an extended period. The contingency plan does explain that during a shutdown, agencies may continue performing activities to the extent such activities are supported by funding that does not require enactment of annual appropriations legislation.

For example, in enacting the Tax Cuts and Jobs Act, Congress provided the Treasury Department with funds that will remain available until Sept. 30, 2019; thus, some implementation activities are not affected by the lapse in appropriations. Though it’s not clear, the tax filing season and the processing of tax returns and refunds may be affected depending on how long the shutdown continues.