ADDRESSING TERMINATIONS, FURLOUGHS, LAYOFFS & REDUCTION IN HOURS DUE TO COVID 19 FOR:

  • Group Medical, Dental, Vision Plans and
  • Contributions for FSA, DCAP, HSA

We have been receiving numerous questions from plan sponsors and their brokers and consultants regarding the impact of certain actions they are taking with respect to their workforce (e.g., terminations, furloughs, layoffs, reduction in hours, etc.) on health and cafeteria plan benefits (e.g., group medical, dental, and vision plans, health FSAs, dependent care FSAs, HSA contributions, etc.).

This communication briefly identifies some of the key issues and provide some general guidance regarding how plan sponsors may address those issues.

Please Note:  This communication is intended to provide general information regarding the topics addressed herein based on information available as of March 27, 2020.  The information contained herein is not intended to be legal or tax advice and may not be relied upon as such.  MEDSURETY encourages each plan sponsor to contact its legal and tax advisors for professional advice regarding the legal and tax issues related to its benefit plans.  Furthermore, plan sponsors should monitor future legislative and regulatory developments as they may have an impact on the information contained in this communication.

Note Regarding Terminology.  Some of the terms used in this communication (e.g., furlough, layoff, etc.) do not have a universal definition.  For purposes of this communication, when we refer to a furlough we are referring to a situation in which an employee is still employed by an employer but is not working due to the COVID-19 crisis.  In general, employers expect to recall furloughed employees to work once the crisis ends.  Some people use the term layoff in the same way while others use the term layoff to refer to a situation where the employment relationship has been severed and the employer does not necessarily intend to recall the former employee.  Any reference in this communication to layoff means a situation in which the employee’s employment has been terminated.

Caution Regarding Plan Changes.  Throughout this document we discuss the possibility of making changes to the plan sponsor’s plan, including changes to the eligibility provisions and other terms and conditions of the plan.  Such changes require a formal process.  For instance, before making changes plan sponsors must confirm that there is an ability to amend the plan to accommodate the changes the plan sponsor wishes to make.  For fully insured plans, the employer should confirm that such changes are acceptable to the insurance carrier.  For self-insured plans, the stop loss carrier must be notified and may or may not agree to consider any additional expenses that result from the amendment for purposes of stop loss coverage.  Furthermore, the plan sponsor should formally amend its plan (through a written amendment) and properly communicate the change to plan participants (e.g., through a Summary of Material Modification).  Amendments should specify whether they are limited in time and scope (e.g., limited to furlough/leaves associated with COVID-19).

 

Group Health Plan Coverage

Q-1:  Will employees remain eligible for these plans (e.g., group medical, integrated HRA, group dental, and group vision) if they are not working, or are working a reduced number of hours, due to the COVID-19 crisis?

Termination of Employment (including layoff) – If an employee’s employment actually terminates, coverage will end under the terms of the plan (subject to continuation coverage rights under state and federal law).  Nothing in the new laws that have been passed to address the COVID-19 crisis requires employers to extend eligibility for terminated employees.  In other words, these events should be treated in the same manner as they have been in the past.

Employees Taking FMLA Leave – Employees taking FMLA leave have the right to continue coverage, at their option, during the period of FMLA leave on the same terms and conditions as active employees (e.g., the employer must continue its contributions to the plan).  This continued coverage is not COBRA coverage.

Note: The Families First Coronavirus Response Act (FFCRA) creates a new type of FMLA leave for the COVID-19 public health emergency.  Employees taking that type of FMLA have the same right to continue coverage under the employer’s group health plans as employees taking other types of FMLA leave.  When employees take this type of FMLA leave, private sector employers are generally able to include the cost of continuing health coverage in the calculation of the tax credit available under the FFCRA.

Furloughed Employees/Non-FMLA Leaves of Absence – In this case, the initial question is whether these employees remain eligible for coverage during the furlough/leave under the plan’s current eligibility requirements.  In many cases, the answer is ‘no’ because most plans require employees to be working a certain number of hours to be eligible.

Note:  Under many plans, eligibility is determined based on the look back measurement method.  In that case, a furlough or leave of absence during a stability period may not cause a loss of eligibility so long as the employee remains employed.  Plan sponsors who are applicable large employers for purposes of the employer shared responsibility requirements need to evaluate these situations carefully to determine the impact on potential penalties.

If the plan does not currently provide for continued eligibility during the furlough/leave, the question then is whether the employer would like to adjust the plan’s eligibility requirements to allow employees to remain eligible during the period of furlough/leave. (See Caution above regarding plan amendments.) If not, COBRA and/or state continuation coverage (to the extent it applies and is available) would be triggered due to the reduction in hours.

Employees Who are Still Working but at Reduced Hours – This situation is essentially the same as the furlough/leave of absence situation.  An employer should review the plan’s eligibility requirements to determine whether employees working reduced hours continue to be eligible.  If not, the employer can consider amending the plan to provide for continued eligibility or offer continuation coverage.

Q-2:  When is COBRA and/or state continuation coverage triggered with respect to these coverages?

Continuation coverage under COBRA and many state laws is triggered when a termination of employment or reduction in hours (including a furlough or leave of absence) causes a loss of coverage.  In the cases of furlough, leaves of absence, and reduction in hours, when continuation coverage is triggered will depend largely on whether the employer decides to amend the plan to provide for continued eligibility for these employees during the period of furlough, leave, or reduced hours.

Caution:  COBRA defines loss of coverage very broadly.  Technically, if the employee’s premiums increase as a result of a reduction in hours, coverage has been lost and COBRA should be offered.  This rule does not typically apply under state continuation laws.

Employees taking FMLA leave do not experience a qualifying event until the FMLA leave expires if they do not return to work at that time (and, under the terms of the plan, their eligibility ends because they are not working).  If employees do not experience a loss of coverage during a furlough or non-FMLA leave, continuation coverage may not be triggered at all assuming employees eventually return to work in an eligible class.  However, if such an employee does not return to work at the end of the furlough or leave of absence, continuation coverage will be triggered at that time.

Note:  Employers are generally able to subsidize the cost of continuation coverage.  Caution should be exercised when subsidizing the cost of continuation coverage only for some continuation participants under a self-insured health plan subject to the Section 105(h) nondiscrimination requirements.

Q-3:  What are a plan sponsor’s options if furloughed employees or employees working reduced hours remain eligible for coverage but have insufficient wages to pay their share of the premium?

If employees will remain eligible during the period of furlough/leave or reduced hours, they may not have enough compensation for the employer to take any required pre-tax contributions or they may not remain eligible to participate in the cafeteria plan.  In that case, employers generally will have two options: (1) they can require employees to pay with after-tax dollars during this period or (2) they can allow employees to catch up their contributions (on a pre-tax basis) after they return to work (and begin participating in the cafeteria plan again).  These approaches are specifically authorized under the FMLA regulations and are typically applied in non-FMLA situations as well.  Employers should carefully consider which approach is best in this situation and then review applicable plan documentation and personnel policies to ensure that their approach to employee contributions in this situation is consistent with that documentation.  Changes should be made to the applicable documents if necessary.  (See note above regarding plan amendments.)

Note:  Plan sponsors also have the option of paying the entire cost of the employee’s coverage during the furlough/leave.

 

Health FSAs

Q-1: Will employees remain eligible for the health FSA if they are not working, or are working a reduced number of hours, due to the COVID-19 crisis?

Termination of Employment (including layoff) – If an employee’s employment actually terminates, coverage will end under the terms of the health FSA.

Employees Taking FMLA Leave.  If the leave of absence is an FMLA leave, the participant remains eligible for the health FSA during the leave as required by the FMLA.  However, participants have the right to elect not to continue participation during the FMLA leave.  In that case, coverage will end during the leave (and expenses incurred during the leave cannot be reimbursed), but coverage must be reinstated if/when the employee returns from the FMLA leave.  Upon reinstatement of the health FSA coverage, employees have two options with respect to their contributions.  Please contact us for more information if this situation should arise.

For participants who continue health FSA participation during an FMLA leave, unless the FMLA leave is paid leave, they may not have enough compensation for the employer to take the required pre-tax health FSA contributions.  In that case, employers generally will have two options: (1) they can require employees to make the contributions with after-tax dollars during this period or (2) they can allow employees to catch up their contributions (on a pre-tax basis) after they return to work.  Employers should carefully consider which approach is best in this situation and review applicable plan documentation and personnel policies to ensure that their approach to employee contributions in this case is consistent with that documentation.  Changes should be made to the applicable documents if necessary.  (See note above regarding plan amendments.)

Furloughed Employees/Non-FMLA Leaves of Absence/Reduction in Hours.  In these cases, whether the participant remains eligible for the health FSA during the leave depends on the eligibility requirements of the employer’s cafeteria plan and health FSA (and, as discussed below, the employer’s group medical plan).  In many cases, these employees will cease to be eligible for the health FSA because they are not working a sufficient number of hours to be eligible.  In this case, participation should terminate in accordance with the termination provisions of the plan, subject to any COBRA continuation rights the participant may have (e.g., if his/her health FSA account is underspent at the time).

Note:  If employees would lose coverage under the health FSA during the period of furlough, leave, or reduction in hours, the employer could amend its plan to provide continued eligibility.  Such amendments must be in writing and properly communicated (see note above).  Furthermore, the health FSA should be amended to extend eligibility only if the employees also remain eligible for coverage under the employer’s group medical plan.

If these employees will remain eligible during the period of furlough, leave, or reduction in hours, they will continue to participate in the health FSA during the leave.  A key issue in this situation is what to do about employee contributions if the leave is unpaid or partly unpaid.  Employers generally follow the FMLA rules in these cases (see discussion above regarding the payment options authorized under the FMLA regulations).  If the employer requires employees to make health FSA contributions during the leave (i.e., pay as you go) and the employee fails to make them, the coverage can be terminated for failure to make the required contributions.  In this case, no COBRA coverage is triggered.  The employer then needs to determine what to do if/when the employee returns to work.  This issue may or may not be addressed in the cafeteria plan document.  There is no requirement to reinstate the coverage as there is when FMLA is applicable.

Caution:  All health FSAs are subject to the uniform coverage rule, meaning while coverage is in effect the full annual benefit (minus reimbursements to date) is available at all times.  If employees remain eligible to participant in the health FSA during the period of furlough or leave, the risk to the employer under the uniform coverage rule increases because employees can use their remaining benefit during the furlough or leave and, in some situations, the employer will not receive a full year’s worth of employee contributions.  This risk cannot be avoided for FMLA leaves.  It is one reason some employers do not allow employees taking other types of leave to remain eligible for the health FSA during the leave.

Q-2 For employees who remain eligible, may they change their elections?

In general, the answer to this question is ‘no’.  The IRS has not announced any relaxing of the irrevocable election rule.  Furthermore, a furlough, leave, or reduction in hours is not an event that allows an election change under the existing rules when it does not impact the employee’s eligibility for the benefit.  In the absence of a change in status that impacts the employee’s eligibility, no changes to health FSA elections are allowed.

Note:  In the non-FMLA context, participants generally do not have a choice whether to continue participation in the health FSA (except when coverage ends and they have a right to COBRA coverage).

Q-3 Is the plan’s claim deadline extended? 

Although employers have the ability to amend their plans to extend the claim deadline to give employees more time to submit claims for eligible expenses incurred in the previous plan year, the COVID-19 crisis does not automatically extend the deadline.  Please contact us if you wish to extend your claim deadline.  A formal amendment and proper communication is required (see note above).

Note:  This extension cannot extend the time period within which eligible expenses may be incurred.

 

Dependent Care FSAs

Q-1 Will employees remain eligible for these plans if they are not working, or are working a reduced number of hours, due to the COVID-19 crisis?

As with the other benefits provided through an employer’s cafeteria plan, the initial issue to consider is whether employees remain eligible to participate in the cafeteria plan and dependent care FSA if they have been furloughed, are taking a leave of absence, or have reduced their hours.  The cafeteria plan and dependent care FSA’s eligibility requirements should be reviewed.

Note:  FMLA does not require employers to allow employees to continue to participate in the dependent care FSA during an FMLA leave unless employees taking other types of leaves are able to do so.

Q-2 For employees who remain eligible, may they change their elections?

In almost all cases, employees who remain eligible for the dependent care FSA should be able to reduce or terminate their dependent care FSA contributions in situations in which they are no longer incurring eligible day care expenses (e.g., because they are not working, their need for day care has been eliminated because they are working from home and caring for their child, or the day care provider has closed) or the amount of care needed has decreased.  The IRS has indicated that when an employee experiences a change in the amount of day care needed for a child, that event is one that enables the employee to prospectively change his/her dependent care FSA election to take into account the change in the amount of care.  Typically this situation is considered either a change in cost or change in coverage event for purposes of Section 125 and virtually all cafeteria plans incorporate these exceptions to the irrevocable election rule (this should be confirmed).  Once the COVID-19 crisis eases and eligible employees once again need day care, dependent care FSA elections can be increased at that time.

Note:  Although dependent care FSA elections likely can be adjusted on a prospective basis, any contributions made prior to the employee’s request to change his/her election cannot be returned.

Health Savings Accounts (HSAs)

Q-1 Will employees remain eligible to make HSA contributions if they are not working, or are working a reduced number of hours, due to the COVID-19 crisis?

As with the other benefits provided through an employer’s cafeteria plan, the initial issue to review is whether employees remain eligible to make pre-tax contributions through the cafeteria plan if they have been furloughed, are taking a leave of absence, or have reduced their hours.  The cafeteria plan’s eligibility requirements should be reviewed.  If desired, the employer could amend the eligibility requirements to allow employees to remain eligible to make pre-tax HSA contributions during this time (assuming the employees will continue to receive compensation).

Note:  FMLA does not require employers to allow employees to continue to make HSA contributions during an FMLA leave unless employees taking other types of leaves are able to do so.

Q-2 For employees who remain eligible, may they change their elections?

In general, HSA contributions elections can be changed at any time.

 

Please contact us for assistance with

Direct Bill – collection of premiums for employees on furlough

COBRA -STATE Continuation

customerservice@medsurety.com

1-888-816-4234

952-303-5700

www.medsurety.com