In light of the nation’s response to COVID-19 and the resultant economic downturn, employers of all sizes face a dilemma of evaluating employee head counts. Many employers are considering furloughs or temporary layoffs to reduce immediate payroll, hoping the downturn lasts for a period of a few weeks instead of months.
Below is a list of several key issues employers should consider as they evaluate their employee benefit programs with an eye toward reducing payroll costs:
- Don’t assume coverage continues during leaves or furloughs. Plan terms typically dictate whether active coverage can continue during short-term leaves of absence, whether paid or unpaid, and many plans have minimum hour requirements to maintain active coverage. Employers that expand coverage for ineligible employees outside the terms of the plan or policy without consent from the insurer or stop loss carrier face significant financial exposure. Recently Diversified Group took the preemptive step of sending out plan amendments to allow for the continuation of benefits for up to 60 days during a furlough or temporary layoff. We worked with all of our stop loss partners to ensure that they would extend stop loss coverage during this time.
- COBRA continuation coverage must be offered for all group health plans subject to COBRA. Without a plan amendment allowing for continuation of coverage, when there is a loss of coverage due to reduction of hours, furlough or temporary layoff, COBRA must be offered.
- Have a plan that details how employees will keep paying monthly contributions. To maintain coverage during any leave period, employees pay their portion of the premium. Premiums may be collected in one of the following manners. If you currently have an FMLA policy, it may be simplest to follow its practices:
Catch up: If you are keeping unpaid employees enrolled in their benefits until they return to active work, you can recoup the employee’s contribution share at the time the employee returns to work. If there is a fairly large premium payment due at the time the employee returns to work following the leave, it may be necessary for the employer to take deductions over several payroll periods. In some cases, state wage and hour laws will limit the amount that can be deducted from pay. The plan sponsor should check with their legal advisor (labor and employment attorney) to ascertain if state wage laws apply. The main problem with the catch-up option identified by employers is that if the employee never returns to work, then it may be difficult or impossible for the employer to recover the employee’s share of premiums paid by the employer during the leave.
Pre-pay: If a furlough/temporary lay-off is typically scheduled in advance, the employer may collect the employee’s share of premium in advance for the entire leave timeframe from the employee’s pre-tax earnings before the start of the leave. However, if the leave is anticipated to span more than one plan year, then the employer cannot collect the premiums for the latter part of the leave since this would violate the cafeteria plan regulations prohibiting deferred compensation.
Pay-as-you-go: During the leave, the employer may require the employee to pay the employee’s portion of the premiums to maintain coverage. Such payments would generally be on an after-tax basis. The employer could require payment no more frequently than regular deduction frequencies for employees during periods of active work. Most employers collect premiums from employees on leave of absence on a monthly basis. The downside to this method is that the employer will have to keep track of payments and provide notifications and grace periods for employees who may be late in their payment. If the furlough/temporary layoff involves a large number of employees, this method may become administratively difficult to maintain.
Whichever method is used, employees should be notified in writing of the terms and conditions under which these payments must be made, including a description of any grace periods, amount of payment to remit, how to remit the payment, impact on pre-tax status, etc.
- Impact on health FSAs. Any payroll deductions through an FSA are discontinued for furloughed/temporary layoff employees. Employees will continue to be enrolled in their Health Care FSA, but will not be able to get reimbursed for any claims incurred as long as they have a “non-pay” status. Employees will get reimbursed again once they return to a pay status and allocations will restart. Any missed deductions from paychecks would be made-up or recalculated over remaining pay periods to match a yearly FSA contribution.
- Impact on HSA Contributions. The employee may suspend HSA contributions for this period, and resume contributions when he/she returns to active employment, or he/she can make after-tax contributions to his/her HSA account directly and deduct those contributions when the employee files his/her tax return for the calendar year.
The terms of other welfare plan coverage, such as life insurance and disability plans, during the furlough/temporary layoff will be governed by their plan documents.