This article provides practical guidance regarding how employers should address eligibility and coverage issues under their group health plans resulting from the coronavirus (also known as COVID-19). For more information on legal issues relating to the coronavirus, see Coronavirus (COVID-19) Resource Site.
To avoid drastic options like mass layoffs or plant closings, many employers are considering other cost-saving measures that affect employees, such as reduced work hours and furloughs. Other employers may be subject to the new paid leave entitlements offered by the Families First Coronavirus Response Act (“FFCRA”).
The FFCRA creates new paid leave entitlements for eligible employees of employers with fewer than 500 employees. These include up to two weeks of paid sick leave for employees who are unable to work or telework for one of the qualifying reasons, such as being subject to a quarantine or isolation order or experiencing symptoms of COVID-19 and seeking a medical diagnosis, among others. Eligible employees with children whose school is closed or for whom childcare is not available due to COVID-19 are entitled to up to ten weeks of paid expanded family and medical leave.
Some of these measures may have unintended effects on employer-sponsored health and welfare benefits and require analysis under a number of laws including the Affordable Care Act (“ACA”), the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), and the cafeteria plan regulations under Section 125 of the Internal Revenue Code of 1986, as amended (the “Code”).
For purposes of this article, we will address the following changes in employment status:
- Reductions in working hours;
- Furloughs and other periods of unpaid leave; and
- Paid time off and paid leaves of absence.
Plan Eligibility and ACA Issues
Q1 – If we decide, instead of laying off workers, to reduce scheduled hours or institute a furlough program, will those workers be able to keep their medical plan coverage?
Since coverage under a group health plan is often dependent on a threshold number of average working hours, a reduction in hours or a furlough could result in an employee’s loss of medical benefits.
It is important to note that, in addition to being dependent on the plan’s eligibility rules, assessing whether reducing an employee’s working hours will cause a loss of plan coverage depends on the manner in which the employer satisfies the applicable coverage requirements of the ACA. For example, if an applicable large employer uses the lookback method on an annual basis to identify its population of full-time employees for ACA coverage requirements during the following stability period, reducing the hours worked by an employee below the 30-hour full-time threshold will not cause an immediate loss of coverage. For employers that use this annual lookback method, we anticipate that the IRS may have to address how material fluctuations in a company’s employee population caused by COVID-19 could change plan eligibility for the next ACA stability period. Alternatively, an employer that identifies full-time employees using the monthly basis will have to track eligibility changes as employees’ hours change.
Employers with fully insured plans should review their insurance policies to find out if reducing hours or instituting a furlough will cause a loss of coverage. Some policies have a requirement that employees be actively at work in order to be covered; however some insurers are making exceptions to continue coverage of furloughed employees. Additionally, since fully insured plans are subject to state insurance laws and regulations, individual states may also pass legislation mandating coverage protections for workers that are adversely impacted by COVID-19. Employers with self-insured plans may be able, or need, to amend their plans to change the manner in which eligibility is determined or provide coverage based on a lower number of hours. However, we recommend also checking with your stop loss carrier as to any impact of amending eligibility requirements or otherwise continuing the coverage of furloughed employees.
Q2 – If our workers that are affected by reduced hours or a furlough would lose eligibility under our health plan, may we just continue to cover them since we anticipate this change in employment will just be temporary?
It is not advisable to simply adopt an informal policy of allowing adversely affected employees to continue coverage for which they are not eligible. In addition to other compliance issues that are raised by failing to follow a plan’s written terms, such a policy may result in benefit claims denials and claims from other ineligible employees that this policy created a deemed amendment to the plan’s eligibility criteria applicable to all employees.
Q3 – What else should we consider before amending our plan to change eligibility requirements?
While one option for addressing a potential loss of coverage will be to lower the required number of hours needed to be a “full-time” employee, that action may cause groups of formerly ineligible employees to receive coverage under the group health plan. The alternative – applying different standards to different groups of employees – could result in significant penalties if an employer subject to the ACA fails to cover at least 95% of its full-time employees.
Please see the section below regarding COBRA for a discussion of how coverage may still be preserved without the need to amend the plan or change existing cost-sharing provisions.
Q4 – Is the affordability of our plan for ACA purposes implicated by a decision to reduce hours or furlough employees?
For 2020, employer-sponsored health coverage satisfies the ACA affordability requirement if the lowest-cost, self-only coverage option available to employees does not exceed 9.78 percent of an employee’s household income.
As discussed in more detail below in connection with Code Section 125 compliance, an employee whose hours are reduced but does not lose plan coverage has a special right to change his or her election under the employer’s plan and elect coverage under the ACA marketplace. That employee, even though offered coverage by the employer, could receive the premium tax credit if he or she was offered minimum essential coverage that was not affordable for that employee. This could raise the specter of an employer shared-responsibility excise tax could be raised. The IRS may need to address this unanticipated ACA-related compliance issue since employment actions are taking place at a rapid pace and premiums may not be able to be adjusted in response.
Q5 – How will plan coverage be affected if my employees are eligible to take paid sick leave?
In the case of paid sick leave under the FFCRA, federal law generally requires that the employer continue health coverage during the period of the leave.
Similarly, in the case of expanded family and medical leave under the FFCRA, if an employee is covered under the group health plan prior to taking the leave, he or she is entitled to continue such coverage during the leave on the same terms as if he or she continued to work. Employers with employees on paid sick leave or expanded family and medical leave under the FFCRA may receive a payroll tax credit, subject to specified limits, for the employer’s cost of continuing the employees’ health coverage during such leave.
Utilizing Continuation Coverage under COBRA
COBRA may provide a helpful option, not only for employees who lose coverage, but also for employers who are seeking ways to limit the negative impact on employees.
To trigger an entitlement to continuation coverage under COBRA, under the terms of the group health plan, there must be a qualifying event that causes the covered employee, or the spouse or a dependent child of the covered employee, to lose coverage under the plan. For this purpose, to lose coverage means to cease to be covered under the same terms and conditions as in effect immediately before the qualifying event. If a qualifying event occurs, each participant for whom the qualifying event results in a loss of coverage must be offered an opportunity to elect to receive the same coverage that he or she had on the day before the qualifying event.
While a complete termination of employment is likely the most commonly understood qualifying event under COBRA, the applicable regulations provide that a reduction of the hours of a covered employee’s employment resulting in a corresponding loss of coverage is also a qualifying event for which an affected employee could elect continuation coverage.
Reduction in Hours and Furloughs. If reducing an employee’s hours of work would cause him or her to lose coverage under the plan, assuming the plan is not amended to adjust eligibility criteria, a notice of COBRA election rights must be provided in the same manner as if the employee’s employment had been terminated. Accordingly, if an employer is evaluating business changes that could adversely affect the workforce, and amending the plan to lower the threshold of hours needed for eligibility is not feasible, COBRA can provide a means by which such employees’ coverage may be preserved.
In addition to protecting coverage, an employer can also ensure that employees are not burdened by increases to their cost of coverage. Although employees electing continued coverage under COBRA may be required to pay up to 102% of the full cost of their plan coverage, an employer may choose to subsidize some or all of the cost of continuation coverage during a period of furlough or reduced hours. Employers should be mindful that, in order to preserve the tax-favored treatment of contributions toward medical benefits, any such subsidy should be offered on a non-discriminatory basis.
When weighing whether to expand plan eligibility to cover employees that have been furloughed or had their hours reduced or to allow those employees to lose coverage and take advantage of COBRA continuation rights, it is important to note that a loss of coverage on account of failing to pay premiums is not a COBRA or ACA marketplace qualifying event. Therefore, an employee who experiences a reduction of hours without a loss of coverage and is later unable to pay premiums on a pay-as-you-go basis risks losing coverage without a corresponding right to continue plan coverage or enroll for coverage from the ACA marketplace.
Because a paid leave of absence does not typically trigger a loss of coverage, an employee who takes paid leave or paid expanded family and medical leave will not have a COBRA right at the time of the taking of such leave, but will have such a right if he or she fails to return to work, and therefore loses coverage, after the leave.
Changing Elections under a Code Section 125 Cafeteria Plan and Premium Payment Options
Code Section 125 must be evaluated also and may provide opportunities in the face of unanticipated employment-related changes due to the COVID-19 crisis.
Code Section 125 is the basis by which employers establish cafeteria plans and permit employees to elect to have medical plan premiums deducted from their wages on a pre-tax basis. Such elections usually must remain in place for the entire plan year, but limited opportunities exist for employees to change their elections because of certain qualifying changes in status.
The regulations under Code Section 125 provide that the following events that employers are currently adopting in response to COVID-19 that change the employment status of an employee, his or her spouse, or his or her dependent are changes in status for purposes of the cafeteria plan election rules:
- termination or commencement of employment;
- commencement of or return from an unpaid leave of absence; and
- changes in employment status that causes an individual to either become or cease to be eligible under the plan.
Under these long-standing rules, a plan participant may make an election change that corresponds with and is consistent with one of the aforementioned events that affects the employee or the employee’s spouse or dependent. For example, if an employee’s spouse is placed on an unpaid furlough, the employee may change his or her election under their plan to change coverage to include the furloughed spouse. Similarly, if an employee’s hours are reduced to such an extent that his or her employment status changes and plan coverage is lost, the employee could change his or her election under that plan. Additionally, his or her spouse, if applicable, would have a corresponding right under their plan to make an election change to add a participant to their coverage.
Interestingly, while significant changes to the cost of coverage or benefit options available under a plan can support election changes under Code Section 125, no provision exists under the regulations for allowing an employee whose hours and, therefore, pay are reduced without affecting his or her employment status or plan eligibility to change an election. An exception, however, does apply that allows an employee to change his or her election under an employer’s plan in response to a reduction of hours so he or she can opt to secure minimum essential coverage from the ACA health insurance marketplace.
Reduction in Hours and Furloughs. If coverage is continued during a furlough or other period of unpaid leave, or an employee’s wages are reduced below what is necessary to pay plan premiums, an employer may accept premium payments on a pay-as-you-go basis. Under this method, employees pay their share of the premium payments on the same schedule as payments would have been made if the employee were not on leave, on the same schedule as payments are made under COBRA, or under any other system voluntarily agreed to between the employer and the employee. The employee generally makes these premium payments on an after-tax basis. However, contributions may be made on a pre-tax basis to the extent that the contributions are made from taxable compensation (e.g., from unused sick days or vacation days) that is due the employee during the leave period or period of reduced hours.
Paid Sick Leave. In the case of paid sick leave, the taking of such paid leave does not entitle the participant to make a mid-year change to their benefit plan election, as the Treasury Regulations only permit election changes in connection with leaves that are unpaid or taken under the Family and Medical Leave Act (“FMLA”). Therefore, an employee taking paid sick leave must continue to participate in the plan based on the cafeteria plan elections in effect prior to the taking of the leave and continue to pay the premiums from pre-tax salary deductions.
Paid Expanded Family and Medical Leave. In the case of expanded family and medical leave, the cafeteria plan rules permit an employee taking FMLA leave to make a mid-year change to his or her benefit plan election. However, employees generally must continue to make any normal contributions to the cost of coverage while on leave.
An employee who takes unpaid leave under FMLA may have additional payment options, including pre-payment of premiums and catch up payments upon return to active employment.
Employers are facing changes to their businesses at an unprecedented pace as a result of the COVID-19 pandemic and facts and circumstances are changing at a rapid pace. Employers who are evaluating reductions to their workforces and are looking for ways to limit the impact these actions have on medical plan coverage should consider the following.
- Review group medical plan documents and policies to identify how reduced hours, furloughs, and other leaves of absence, including protected leave under the FFCRA, affect plan eligibility.
- Be proactive with COBRA administrators to ensure that all qualifying events are identified, notices and election instructions are provided, and employees who lose coverage have ready access to information.
- Seek information from plan administrators regarding options for how premiums can be paid and collected, especially if the employer will contribute toward the cost of COBRA coverage premiums or employees on unpaid leaves will continue to remit payments on an after-tax basis.
- Be aware that employees that are affected by certain changes to their employment, including such actions taken by other employers that affect their spouses or dependents, may have rights to voluntarily change their plan elections.
- Verify that plan provisions, rights, responsibilities, sources of information, applicable deadlines, and other resources are communicated to employees in a manner that is reasonably certain to get understandable information into employees’ hands.
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