In light of the current COVID-19 health care crisis, employers are considering numerous options in the face of closed businesses and reduced income. These considerations include reducing employee work hours, furloughing employees (placing them on unpaid leaves of absence), and even terminating employees. Each option has its own potential impact from a benefits perspective.
First, all employers should recognize that the particular benefit plan documents control in determining eligibility, when coverage ends, and when and how any benefits are paid. The plan provisions are particularly important when it comes to coverage during a reduction in hours or a leave of absence. Generally, an employee is eligible for benefits if he or she works at least 30 hours per week and is active or on leave under the Family and Medical Leave Act, including the expansion that President Trump signed into law on March 18. Some plans allow for coverage for part-time employees, employees on a specifically defined leave of absence (this could be paid or unpaid leave, leave for a specific period of time, a specific type of leave, among others). Benefit plan eligibility ends at the time provided in the particular plan. For health plans, for example, coverage could end on the last day of active employment, the end of the pay period, or the end of the month.
Employers who continue to cover individuals who are not eligible for benefits are not in operational compliance with their plan documents, and that non-compliance could be a breach of their fiduciary duty. In addition, where insured health plans are considered, a change in coverage without an agreement from the health insurer would technically be a breach of contract with the health insurer. Even if the health insurer agrees to a change in coverage, the employer needs to be aware of the implications of that change. For example, will the change in coverage cause an impermissible discrimination issue? If so, even if a health insurer, for example, agrees to a change in coverage, the change would not be viable.
To change coverage under a particular benefit plan, an employer would first need to confirm that the proposed change does not create any discrimination or coverage issues. Then the employer would need to amend the plan document to specifically provide eligibility to the intended group.
Also, employers should keep in mind that if they have any severance plans, terminated employees may be eligible for benefits under those plans as part of their termination. In addition, if employers pay any compensation to employees as part of their termination packages, this could create an ERISA severance plan. Employers should carefully consider the options available upon termination of employment.
One of the main concerns employers (and employees) have when deciding how to reduce employee headcount is health care coverage. If an employer continues to maintain any group health plan of the same type, COBRA comes into play. This means that coverage for health, dental, medical flexible spending accounts, and EAPs may continue for those employees who elect such coverage if the employees lose coverage due to termination of employment or a reduction of hours below the number of hours required for eligibility. Note that COBRA applies on a controlled group basis, so continued coverage may be required if one of the entities within the controlled group continues to maintain a group health plan.
In an effort to assist employees during the COVID-19 health care crisis, many employers are considering subsidizing the COBRA premiums of former employees. Subsidizing COBRA premiums can be problematic. For example, once an employee elects COBRA coverage, the employee is not eligible to participate in the health care marketplace coverage available under the Affordable Care Act until the marketplace open enrollment period. This means that if an employer subsidizes coverage for two months, the employee will be responsible for the full premium once the subsidy ends. This premium will undoubtedly cost more than if the employee sought coverage in the marketplace at the outset. In addition, there is a risk of discrimination issues if the subsidies are provided to highly compensated employees but not employees who are not highly compensated.
Employees who are placed on leaves of absence may continue to be eligible under the group health plan if the plan document includes them in coverage. If they are not included, and the employees suffer a reduction in hours that leads to a loss of coverage, COBRA would apply. Employees can still be required to pay their share of premiums during a leave of absence, and this payment can occur via pre-payment, continuation of payment as the employee paid while actively employed (i.e., weekly, biweekly or monthly). The amounts paid can be billed to the employee, or the employer can pay the entire premium during the leave of absence and recoup the employee portion when the employee returns to work. Employers should be aware that in addition to COBRA considerations, if an employee is placed on a “leave of absence,” but is still considered to be full time, this could trigger the ACA employer mandate penalty of $2,000 per full-time employee if the employer does not provide coverage to at least 95 percent of full-time employees. Moreover, if the employee has pre-tax contributions under a cafeteria plan (including flexible spending accounts), it is important to review how a leave or termination/rehire may affect those contributions. For example, a cafeteria plan may include a reduction of hours as a qualifying event permitting a mid-year election change. The employer can allow employees on a leave of absence or layoff to continue to make contributions during the leave or layoff, but if contributions are not continued expenses incurred during the leave of absence or layoff may not be covered. If an employer chooses to make a uniform reduction in pay as opposed to a uniform reduction in hours, however, the employee may not be able to make any mid-year election changes to their cafeteria plan elections.
Where health coverage is fully insured, employers must work with their health insurers to be certain that they meet their contractual obligations. For example, group health insurance contracts often impose contractual obligations on employers to take specific action in the event of a reduction in the number or percentage of employees eligible to participate. A notice period is often mandated, and if a specific number or percentage of employees are not covered, this could lead to potential termination of the group health insurance contract. Importantly, as noted above, if an employer seeks to provide coverage to individuals who are no longer eligible for coverage, the employer must work with the insurer to amend the plan to provide that coverage. If the employer attempts to provide coverage that is beyond the terms of the contract, the employer may be liable for self-insuring the benefits. In other words, the insurer will not pay the benefit claims, which means that the employer will be responsible for payment without the stop-loss cap that truly self-funded plans have in place.
Finally, during these times of ever-changing medical care issues, it is as important as ever to give the correct information about an employee or dependent’s coverage to the insurer or third party administrator as soon as possible in the event the employee or dependent seeks medical care (for example, precertification of hospital admissions).
Group life insurance plans must be evaluated for employees who are terminated from employment or placed on leaves of absence. Employees who lose life insurance coverage may be entitled to conversion rights. If conversion rights apply, the employer must ensure that the individual receives a timely conversion notice so that he or she has an opportunity to continue coverage (if applicable). If timely notice is not provided and there is a lapse in coverage, the employer may find itself liable for self-insuring any death claims.
Employees who are terminated or facing a reduction in hours will often look to their retirement plans for distribution opportunities. While employed, employees have a limited ability to get distributions from their 401(k) and other retirement plans. Typically, provided the plan allows for in-service distributions, employees are limited to distributions based upon narrow hardship reasons, loans that must be repaid, and general distributions at age 59 ½ or older. Safe harbor hardship distributions are limited to expenses for medical care, costs directly related to the purchase of an employee’s principal residence (but not mortgage payments), tuition and related educational fees, room and board for post-secondary education, payments necessary to prevent eviction from an employee’s principal residence or foreclosure on the mortgage for that residence, funeral expenses, and certain expenses related to damage to the employee’s principal residence. In addition, if the plan permits it, hardship distributions may be available for expenses and losses (including loss of income) incurred by participants whose principal residence or principal place of employment is located in a FEMA-declared disaster under the Stafford Act. A disaster declaration was recently issued for New York State, and, thus, residents and persons whose principal place of employment is New York may now be eligible for hardship distributions under the FEMA-declared disaster exception, assuming the applicable plan provides for such a distribution. If no in-service distributions are available (or the employee is not eligible for one), an employee is generally not eligible for a distribution until separation from service (for example, the employee actually terminates from employment). A leave of absence generally does not qualify as a separation from service, and, thus, employees placed on leaves of absence may be limited to the normal in-service distributions, if permitted.
Also, it is important to remember that participant allocations generally are based on hours of service worked and compensation. It is important to determine whether any type of payment to individuals will be “compensation” under the plan and how any reduction in hours or leave of absence might affect employees. Additionally, many plans have a vesting schedule for employer contributions. Thus, if an employee is not fully vested, termination may result in forfeiture of unvested employer contributions. Plans, of course, can be amended to fully vest affected individuals. Moreover, if 20 percent or more of participants are affected (which may be determined over an extended period), vesting may be required due to a “partial termination” of the plan.
In addition to a reduction in the workforce, employers are looking at other ways to save money during these uncertain times. One option is to suspend employer nonelective and matching contributions. Employers who provide discretionary contributions may amend their plans to suspend these contributions on a prospective basis. Employers who provide safe harbor contributions, on the other hand, may suspend these contributions only on a prospective basis after meeting certain requirements, including notice requirements. To suspend a safe harbor contribution, (1) the employer must be operating at an economic loss, or (2) the safe harbor notice provided to employees in the prior year must have included the ability to amend the plan to suspend or reduce the safe harbor contribution. A supplemental notice must be provided to employees advising of the suspension or reduction, and the suspension or reduction cannot take place until at least 30 days after all eligible employees receive the supplemental notice. Employees must be given a reasonable opportunity to change their deferral elections after receiving the supplemental notice, and the plan must be amended to reinstate the nondiscrimination testing that the safe harbor contribution avoided.
Other benefit coverage issues
As with life insurance, if employees participate in any optional coverages, it is important to determine whether the optional coverages will convert to individual coverage or will terminate. Similarly, if any employees are on short-term disability or long-term disability, it is crucial to determine what will happen with regard to continuation of disability coverage, continuation or termination of any other benefits, and what happens to their employment status.
Legislation related to COVID-19 concerns continues to change things in the immediate future for group health plans as well as other benefits. For example, many employer group health plans are now required to cover COVID-19 testing, as well as services related to that testing, without any cost sharing. This may require an amendment to the employer’s group health plan or written directive to the employer’s health insurer to amend the insurance contract cover the cost. The Internal Revenue Service has issued a notice indicating that any testing and related services provided by high-deductible health plans without a deductible, or a deductible below the required minimum, will not affect the status of the health plan as a high-deductible health plan. Telehealth is becoming more pervasive as health care providers and patients attempt to limit contact. As a result, the Office of Civil Rights has indicated that it will not impose penalties for noncompliance with the Health Insurance Portability and Accountability Act by health care providers in connection with the good-faith provision of telehealth services.
Various items currently being considered are changes to cafeteria plan elections allowing for specific COVID-19 related relief and providing of special enrollment periods related to COVID-19 diagnoses. In the retirement plan arena, there is speculation that Congress might act to remove the 10 percent penalty on distributions made to terminated employees under the age of 59 ½.
Assuming that there are no specific issues with terminating employees or reducing hours under employment laws, companies still should review any specific plans that involve taking actions that could be construed as interfering with rights of employees to receive benefits. For example, terminating specific employees who may have had high health claims or may be ill could lead to potential liability under Section 510 of ERISA. As difficult as it may be, employer actions must follow plan and legal requirements to avoid potential disqualification and other penalties (as well as to avoid potential fiduciary liability).