Reprinted from the November 19, 2007, issue of PERSONNEL LEGAL ALERT, a widely read employment law newsletter that keeps HR executives up-to-date on the latest court cases, legal trends, government regulations, and federal legislation that affect the policies you write and procedures you administer. Click here to view a sample issue, get more information, or sign up for a risk-free subscription.

Employees In A Financial Crisis...
What's An HR Professional To Do?

Your money or your home. Employees caught in the sub-prime mortgage
squeeze may be facing just such a choice right now. The fact is that employees in distress aren’t productive. Employees will likely turn to HR for information on sources they can tap to stave off foreclosure. You can respond with some financial and other basic information.

EAPS AND COUNSELING

Companies should take advantage of their employee assistance programs (EAPs) if they have one and suggest that employees in financial distress seek help. If EAP offerings don’t currently include financial counseling, consider adding it. You could even be a little generous and allow employees to use EAP services during work hours (to a limit, of course). In addition, the company can directly offer employees financial planning counseling, either in a group setting or individually.

As for credit counselors, stick with organizations that have been granted tax-exempt status by the IRS; they’re more reputable. Make a list of credit counselors available to employees (include websites). You can arrange for credit counselors to meet with employees, also in a group setting or discreet individual meetings.

401(k) DISTRIBUTIONS

The tax laws allow employees to tap into their 401(k) accounts, but it’s not easy and it’s not cheap — hefty penalties, including a 10% early withdrawal tax, apply. There are two ways employees can access their 401(k) accounts — loans or hardship distributions. However, 401(k) plans aren’t required to offer employees either option. Brush up on your 401(k) plan’s provisions so you can answer employees’ questions. Here are the basics about tapping into 401(k) plans.

If your plan allows loans, the amount employees can borrow is limited to 50% of their vested balances, capped at $50,000. Employees must repay their loans in equal payments, at least quarterly; loans usually can’t last longer than five years. Employees customarily repay their loans via paycheck withholding. Less take-home pay may be unattractive to employees who are already strapped for cash.

The IRS has developed criteria to determine whether employees qualify for hardship distributions. Under those rules, distributions are deemed necessary to satisfy employees’ immediate and heavy financial needs if they have obtained all other currently available distributions from loans under the plan, and are prohibited from making pre-tax contributions and after-tax contributions for at least six months after receiving their distributions. Caveat: You can’t make hardship distributions if you have actual knowledge that employees can arrange alternative financing, such as liquidating other assets, stopping contributions into the plan, or borrowing from other commercial lenders.

UPTICK IN GARNISHMENTS

Revisions to the bankruptcy laws in 2005 make it considerably more difficult to declare bankruptcy. Employees who are marshaling all of their available resources to pay their mortgages may be defaulting on payments to other creditors. Upshot: Creditors who are stiffed will go to court and get a garnishment order requiring that a certain amount be withheld from employees’ wages to pay down the debt.

Garnishment is a tangle of federal and state laws. As with so much of employment law, the law that applies is the one that gives employees the most protection. For example, the federal Consumer Credit Protection Act states that employees whose wages are subject to a creditor garnishment can’t be fired for one indebtedness. State laws, on the other hand, may flat out prohibit you from firing employees. Moreover, employees whose wages are subject to child support withholding can’t be fired because of it, period.

It takes some time for creditors to obtain garnishment orders, which gives you some breathing room right now. Work with the Payroll department to develop a standard data set that can be applied when garnishment orders come in. Surf to your state labor department’s website to gather information. What you’re looking for:

• whether creditor garnishment is allowed,

• wages subject to garnishment,

• the maximum amount of wages that are subject to garnishment,

• the garnishment time periods, and

• priorities among garnishment orders (child support always takes priority).

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