As a growing percentage of the workforce is affected by the COVID-19 virus, employers are being asked to respond to benefit-related questions from employees. In the coming days, the Employee Benefits Group at Hanson Bridgett will be providing updated information on possible issues arising in the benefits area through Benefits Alerts and postings on Hanson Bridgett's Online COVID-19 Resource Center. Regulatory and legislative changes are occurring rapidly, and we will make every effort to keep our clients informed of new developments occurring in this area as they occur. Below are some of the most frequently questions (and answers) received thus far. We have included questions applicable to all employers, as well as some questions only affecting governmental employers. Of course, your particular benefit plan provisions may impact the answer to some of these questions. Please feel free to reach out to your contact in the Employee Benefits Group with more specific questions about your benefits issues.
Questions Applicable to All Employers
Question 1: Is an employer health plan required to provide testing for and treatment of COVID-19 without a deductible or at a reduced cost?
Answer 1: As of March 13, 2020, this may depend upon whether the employer's health plan is fully insured or self-insured. A growing number of states, including California, are requiring insurers of health plans to waive copays and other out-of-pocket expenses for COVID-19 testing to make sure cost does not impede public health efforts to control the spread of the virus. On March 5, under the direction of Governor Gavin Newsom, the California Departments of Managed Health Care and Insurance directed all commercial and Medi-Cal health plans and insurance carriers regulated by the Departments to immediately reduce cost-sharing to zero for all medically necessary screening and testing for the COVID-19. This includes waiving cost-sharing for emergency room, urgent care, or provider office visits when the purpose of the visit is to be screened and tested for COVID-19. The need for COVID-19 testing is based on medical necessity, a clinical determination made on a case by case basis by medical professionals.
The Departments also urged health plans and insurance carriers to work with their contracted providers to use telehealth services to deliver care when medically appropriate, as a means to limit individuals’ exposure to others who may be infected with COVID-19, and to increase the capacity of insurers’ contracted providers and facilities.
Employers sponsoring insured health plan coverage will want to coordinate with their insurer to provide appropriate information to employees, including, where applicable, information about using telehealth services.
At this time, employers sponsoring self-insured plans would make the decision regarding reducing or eliminating cost-sharing related to COVID-19. However, we note that as of March 11, several bills have been introduced at the federal level that may impact self-insured plans, as well as insured plans, in this area (see, e.g., HR 6193 (which would amend Title XXVII of the Public Health Service Act to require group health plans and health insurance issuers offering group or individual health insurance coverage to provide benefits under such plan or such coverage for a 30-day refill of prescription drugs to individuals who reside in emergency areas during emergency periods); HR 6213 (which would provide for coverage, without cost-sharing or utilization management requirements, under group health plans and individual and group health insurance coverage of testing for COVID-19 ); S3442 (which would require private health insurers to cover costs related to COVID-19 without cost-sharing)).
Question 2: Can an employer amend its high deductible health plan ("HDHP") to allow testing for and treatment of COVID-19 without a deductible or with a deductible below the current required minimums?
Answer 2: Yes. On March 11, 2020, the IRS issued Notice 2020-15 making clear that until further notice all medical care services received and items purchased associated with testing for and treatment of COVID-19 that are provided by a health plan without a deductible, or with a deductible below the minimum annual deductible otherwise required for an HDHP will be disregarded for purposes of determining the status of the plan as an HDHP.
Question 3: Can employers allow changes to employee elections under their Code section 125 cafeteria plans to reflect changes in circumstances due to COVID-19?
Answer 3: Treasury Regulations Section 1.125-4 describe the situations under which employees may revoke or change elections made prior to the beginning of the plan year under a Code Section 125 cafeteria plan. The types of changes that may create the ability to revoke elections include a change in the employment status of the employee (or the employee's spouse or dependents) or the offering of a special election period under the plan by the employer. The change in the election has to be consistent with the change in status, which could include situations where as a consequence of COVID-19, the employee (or his/her spouse or dependents) have a reduction in work hours such that eligibility for or cost of coverage changes. We will also be watching to see if further guidance is issued by the IRS in this area. In addition, we note that legislation introduced on March 11 (S3442) would require private health insurers to provide for special enrollment periods for individuals diagnosed with COVID-19.
Employees who are absent from work due to their own illness or to care for a family member may be eligible for Family and Medical Leave Act (FMLA) leave. During an unpaid FMLA leave, an employee must be permitted to revoke their health coverage, including coverage under a health flexible spending account (health FSA), or to continue coverage but discontinue payment of the employee’s share of the premium costs under the health plan, or discontinue FSA contributions during the unpaid FMLA leave. Generally, employees may be permitted to pay their premium share upon returning to work, during the leave using after-tax dollars, or to “pre-pay” before taking leave. Employers should review their plan documents to determine which options are provided, and whether employees who discontinue health FSA coverage during an FMLA leave may resume coverage upon returning to work at the original contribution level, or at a pro-rata level such that the employee’s payroll deductions are not increased for the remainder of the year.
Question 4: Can employees receive a loan or hardship distribution from their 401(k) or other defined-contribution retirement plans on account of expenses related to COViD-19?
Answer 4: The IRS has not issued specific guidance about retirement plan loans or hardship distributions related to COViD-19. Hardship distributions from a 401(k) plan, if permitted under the plan, can be made only if necessary to satisfy an immediate and heavy financial need. For plans incorporating the IRS “safe harbor” events that are deemed to be made on account of an immediate and heavy financial need, a hardship distribution is allowed for expenses for (or necessary to obtain) medical care (as defined in Internal Revenue Code section 213(d)), if the recipient of the medical care is the participant, or a spouse, dependent or a named beneficiary under the 401(k) plan.
Employees who participate in a 457(b) plan may qualify for an “unforeseen emergency” distribution, if permitted under the plan, in the case of a severe financial hardship of the participant or beneficiary resulting from an illness, including the need to pay for medical expenses. A distribution for an unforeseen emergency may be made only to the extent the emergency cannot be relieved through reimbursement or compensation from insurance or otherwise, or by liquidation of the participant’s assets, unless the liquidation of assets would itself cause severe financial hardship.
401(k) and other defined-contribution retirement plans that permit participant loans generally do not limit the purpose for which a loan can be taken, although there may be restrictions on the number of loans available from the plan at any one time, and the amount of any loan, the repayment period, and other loan terms must comply with IRS rules for participant loans from retirement plans.
Under the Taxpayer Certainty and Disaster Tax Relief Act of 2019, a plan participant could receive a qualified disaster distribution of up to $100,000 penalty-free if the President declares the COVID-19 situation a major disaster under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act and the participant’s principal place of abode is located in the qualified disaster area and has sustained an economic loss by reason of such qualified disaster. The President declared the COVID-19 situation a national disaster on March 13, 2020.
Question 5: Can an employer establish catastrophic leave-sharing or disaster leave-sharing programs to allow employees to assist one another with COVID-19 situations?
Answer 5: The rules for the two types of leave-sharing programs differ. The IRS has provided guidance under Notice 2006-59 as to the way in which a disaster leave-sharing program must be operated. That Notice provides guidance on the federal tax consequences of certain leave-sharing plans that permit employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster. A major disaster is defined as (a) a major disaster as declared by the President under § 401 of the Stafford Act, 42 U.S.C. § 5170, that warrants individual assistance or individual and public assistance from the federal government under that Act, or (b) a major disaster or emergency as declared by the President pursuant to 5 U.S.C. § 6391, in the case of employees described in that statute. As of March 13, President Trump signed an emergency declaration with respect to the COVID-19 circumstances. Employers can now set up a program under the rules established under Notice 2006-59, and the leave deposited can only be used for this particular disaster.
With respect to an employer-sponsored catastrophic leave-sharing program, the IRS provided guidance under Revenue Ruling 90-29 that would permit the recipient and not the donor to be taxed when a program allows donated leave to be used only for medical emergencies. The catastrophic leave-sharing program must meet three requirements: (1) employees requesting the additional leave are required to submit a written application describing the medical emergency to the employer; (2) after the application is approved and the employee exhausts all of his or her paid leave, the employee is eligible to receive paid leave (at his or her normal rate of compensation) donated by other employees; and (3) the program restricts the amount of leave that can be donated and contains rules regarding how the leave will be granted to leave recipients. The IRS considers a “medical emergency” making the recipient eligible for leave donations to be a medical condition of the employee (or family member of the employee) that would require the prolonged absence of the employee from work and would result in a substantial loss of income to the employee because the employee would have exhausted all paid leave available (not considering leave that might be available under the leave-sharing program). In a 2007 Private Letter Ruling, No. 200720017, the IRS approved of a leave-sharing plan that defined a medical emergency as a major illness or other medical condition (e.g., heart attack, cancer, etc.) that requires a prolonged absence from work, including intermittent absences that are related to the same illness or condition. While not all cases of COVID-19 will meet this criterion, it is clear that for significant illness this type of program could provide an opportunity for co-workers to assist those who may exhaust their leave balances for their own or a family member's illness from COVID-19.
We note that House Democrats, late on March 11, 2020, introduced emergency legislation to help reduce the economic impact of the coronavirus outbreak by providing financial backing to those most immediately affected, including an expansion of paid sick leave and unemployment benefits. To the extent paid leave is made available if legislation passes, of course this would affect the eligibility for catastrophic leave-sharing donations for employees.
Questions Applicable Only to Governmental Employers
Question 1: If an employer extends additional benefits to employees or retirees, is there an issue of "gift of public funds"?
Answer 1: Section 6 of Article XVI of the California Constitution states in part: “The Legislature shall have no … power to make any gift or authorize the making of any gift, of any public money or thing of value to any individual, municipal or other corporation whatever…”
Gifts of public funds are prohibited under this constitutional provision, whether at the state or local level of government. (See Community Memorial Hospital v. County of Ventura (1996) 50 Cal.App.4th 199, 207; Paramount Unified School Dist. v. Teachers Assn. of Paramount (1994) 26 Cal.App.4th 1371, 1388; Goodall v. Brite (1936) 11 Cal.App.2d 540, 544-545.) Governmental employers often must analyze this issue when something of value is being provided, particularly to retirees who have completed providing services to the public agency, without the expectation of further services being provided. In this case, the additional benefits that a public agency might consider providing (such as perhaps lowering co-pays or deductibles) presumably would not be "gifts" but actions taken to protect the health and safety of all the participants in the public agency's programs.