With the combination of our nation’s response to COVID-19 and the resultant economic downturn, employers of all sizes face the moral and financial dilemma of evaluating employee headcounts while businesses are grappling with the reality of the current situation. Many employers are considering furloughs, or other types of approved leaves of absences, to reduce immediate payroll, hoping the downturn lasts for a period of a few weeks instead of months. Other employers are opting to implement systemic reductions in the workforce and let employees go. The focus of this article is to highlight that different employment actions produce different employee benefits consequences that must also be part of any employment decision.
No general rules apply to every situation, as all circumstances are somewhat unique. Below is a list of several key issues employers must consider as they evaluate their employee benefits programs with an eye toward reducing payroll costs:
- Don’t assume coverage continues during leaves or furloughs or automatically ends immediately upon termination of employment. 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.
- COBRA continuation coverage (or state continuation coverage, if applicable) generally must be offered for all group health plans when there is a loss of coverage because of a termination of employment or reduction in hours. An increase in the employee’s share of the premium because of his or her reduction in hours (including to zero, as in a furlough) is a loss of coverage for this purpose.
- The Affordable Care Act employer penalty should be considered. Terminating the group health plan coverage for an employee when a leave or furlough begins may cause an ACA penalty for failing to offer coverage to 95% of full-time employees. And the coverage offered must remain affordable to avoid an ACA penalty, which may require a continued or increased employer subsidy, whether on active or COBRA coverage.
- Plan for how employees will keep paying monthly premiums/contributions to maintain coverage during any leave period. Failure to pay monthly premiums could cause coverage to lapse without COBRA protections for health, dental and vision plans, invalidate future Health FSA and Dependent Care FSA claim reimbursements and could also trigger obligations to reinstate life and other disability plan arrangements only through evidence of insurability. Arrangements should be made in advance with employees about how they will keep contributing to any allowable coverage during leave, whether through a COBRA vendor, ACH payment from a personal checking account or by mail.
- Before taking any employment actions, the employer should first determine whether it maintains or maintained any formal or informal severance plan or policy that provides a precedent for what benefits may be offered to terminated employees.
- 401(k) and other retirement plan implications must be considered. A reduction in force, layoff or furlough could cause a “partial termination” under a 401(k) or other retirement plan rules, which triggers 100% vesting for affected participants. Review hardship and other distribution provisions, and make sure plan loan provisions are reviewed and followed so that “deemed distribution” consequences may be avoided. Service credit for vesting and employer contributions can also still be required during leaves or breaks in service. “Safe harbor” match or other fixed contribution provisions should be suspended only after considering the potential ramifications and taking the required implementation measures. Employers should be vigilant in maintaining the same payroll deposit schedule for employee salary deferrals.
- Employers should review all deferred compensation agreements and other employment agreements for any leave or termination impact. Such agreements may have short-term bonus payouts or other incentive payment obligations due to any “termination without cause” or other “separation from service” that cannot be altered without a review of all implications of Section 409A of the Tax Code. These rules generally prohibit employees from making salary deferral election changes mid-year (including canceling elections) and/or changing the timing of payments.
This is by no means an exhaustive list of all issues to consider before final decisions are made related to any short-term or long-term reduction in employee payroll. Each employer must evaluate the issues to find the best options during these challenging times.