In today’s tough economy, employers are scouring every crevice of their business for cost-cutting potential. Still, employers should be aware of certain rules and regulations before instituting any major changes. 

Otherwise, they could end up with unexpected legal problems on their hands. Lisa Van Fleet, a partner in the St. Louis office of the law firm Bryan Cave, specializes in employee benefits and compensation law and provides the following guidance on the top 10 things employers should be aware of when trimming their budgets.

1. Severance/COBRA: Employers may want to “coordinate their severance in light of the new COBRA subsidy that an individual will be entitled to,” suggests Van Fleet. In other words, the employer could shift the initial cost to the former employee and give them cash or some other benefit in absence of a subsidy.

2. Qualified Plans: Van Fleet insists that employers and fiduciaries pay close attention to the investments offered under their plan and keep an eye on those who help run those plans, especially in light of recent questionable actions by insurance companies, brokerage houses and banks. Additionally, though a fine line, it is important to disclose risks and communicate the investment strategy to plan participants without proffering advice. This means lots of disclaimers, she says.

3. Qualified Plans: Determine whether reductions in force or other severance arrangements trigger a partial termination and accelerated vesting. Even if you don’t hit the magic number — 20% of participants — that signifies a partial termination, Van Fleet suggests that employers consider fully vesting those individuals.

4. Qualified Plans: Employers should debate whether it is desirable to consider severance pay as compensation for contribution and other benefit purposes before the employee is terminated and rectify the plan accordingly.

5. 401(k) Plans: According to Van Fleet, more employers dropped their safe harbor status to make ends meet in 2007 and 2008 and were thus required to provide 30-day advance notice to participants while simultaneously minding nondiscrimination requirements. If a company moves in the opposite direction and eliminates non-safe harbor matches, the change may restrict its ability to provide matches to highly compensated employees in the following year.

6. Pension Plans: If you are considering a reduction in future benefit accruals, advanced notice of the reduction must be given to those affected participants under ERISA and the tax code. Within the notice, it may be necessary to include examples of how the reduction affects participants.

7. Pension Plans: The consequences of an underfunded pension plan are diverse and dangerous; they can restrict employers’ ability to provide lump-sum distributions, make them unable to fund a rabbi trust, and most notably, make them unable to obtain credit or to comply with existing credit agreements.

8. ESOPs: Van Fleet recommends updating valuations to avoid improper distributions. Furthermore, if an employer is making distributions more rapidly than is required, it should review the distribution policy and consider taking advantage of the maximum distribution period.

9. Deferred Compensation Plans: If making a scheduled payment under a deferred compensation plan would threaten a company’s ability to survive, the payment otherwise due may be temporarily suspended under Section 409A. What is more, the ability to terminate and liquidate nonqualified deferred compensation plans is restricted under Code Section 409A when the company is having difficulties staying afloat.

10. Health Plan Changes: Reductions of employer contributions and/or coverage under health plans must be enacted in accordance with ERISA requirements regarding plan amendments and participant notices. For example, “normally you would have until 210 days after the effective date of [the new] amendment to actively tell your participants [of the reduced benefit],” says Van Fleet, “but if you modify a group health plan, then you have a much shorter time frame of no later than 60 days after the date of the adoption.”

Related coverage:

• See the new IRS info on claiming the COBRA subsidy
• Understanding new compliance issues under Section 409A
• Put it in writing