Strategy

Set Aside a Reserve for Reservists, Consultant Cautions

Employees returning from military duty are entitled to pension accruals from employers.
David KatzOctober 5, 2001

When President Bush addressed Congress after the September 11 terror attacks, he had a simple message for the military: “Be ready.”

With the government’s recent authorization of a call-up of as many as 50,000 reservists (for up to 24 months), a finance chief would do well to follow the advice of the commander-in-chief. Consultants point out that wholesale call-ups of reservists can cause vexing staffing problems, particularly if key workers are gone for long stretches of time. Moreover, when Johnny comes marching home, employers can find themselves on the hook for substantial — and unexpected — pension and health-care plan liabilities.

Generally, small to midsize companies get hit worse when reservists are called to duty. But consultants point out that big companies are also at risk, particularly if a call-up involves tens of thousands of reservists or if a conflict lasts for years.

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Indeed, for a company with a large percentage of reservists — and close-to-the bone retirement funding — the benefit issues can get downright thorny. Under the Uniformed Services and Employment and Reemployment Rights Act, if reservists return to their employers after serving in connection with an involuntary call-up, they get credit on their defined-benefit pension plans for all the time served. If many return after, say, three-year tours of duty, “that’s going to pop your pension liability a bit,” says Tom Murphy, a principal with the Unifi Network of PricewaterhouseCoopers in Teaneck, New Jersey.

In the case of defined-contribution plans, including 401(k)s, employers must provide all retroactive allocations and applicable matching and nonmatching contributions into the accounts of returning reservists called up involuntarily.

The liabilities could mount up fast, with the result that the employer ends up underfunding the retirement plan. “You have to reserve for the reservists coming back,” says Murphy. The kicker in gauging the size of those reserves, however, is that an employer can’t know for sure how many reservists will return to the company. Only returnees have the right to benefit accruals and retroactive matches. And, as Murphy notes, since it’s no easy task determining how many reservists will come back to the company, companies can overdo the estimate for pension and savings-plan reserves. Plan sponsors can avoid having to true up reservists’ accounts in the first year they return, however, by amortizing the passed-service liability over five years, adds Murphy.

Employers also have to decide what to do about reservist health benefits. If called-up soldiers serve 31 days or more, employers can stop paying for their benefits and offer them the rights to buy the 18 months of coverage offered under the Consolidated Omnibus Budget Act (COBRA) for no more than 102 percent of the full premium of the plan. (For hitches of less than 31 days, called-up reservists are entitled to full employee health coverage.)

For the moment, many employers are choosing to go beyond the minimum. In the wake of the terror attacks, 47 percent of 51 employers in a recent survey said they will provide full benefits for both reservists and their dependents for either a specified period of time or an indefinite period to be determined by management. That survey, conducted by Watson Wyatt Worldwide, was released this week.

Of course, that sort of generosity might not last if the call-up grows substantially, or if corporate earnings continue to slide. For now, however, employers are tending to err on the side of largesse when dealing with reservists on their payrolls. While companies aren’t required to pay employees on military leave, for instance, 60 percent of those surveyed by Watson Wyatt said they would make up the difference between regular and military pay. In the current labor market, “employers are being more generous than required,” observes Jane Lassner, senior consultant at Watson Wyatt. Being less generous may not be such a swell idea, particularly if the media gets wind of the policy. Given the current patriotic mood in the United States, adds Lassner, “Employers aren’t going to want to look overly frugal.”

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