As Vermont begins to adapt to the COVID-19 pandemic employers are considering hour reductions, temporary closures, downsizing their workforces and furloughs. All of these alternatives can impact employee benefits. Although the right solution for employers will be determined based on their unique facts, circumstances and plan rules, below is general information about some of the primary benefit issues employers are facing
As this brief is being published, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) is in the final stages of negotiation and state and federal responses to the COVID-19 have been rapidly moving and remain extremely fluid. Information in this brief may be subject to change.
Employer Health Insurance Considerations
Employers are making tough decisions to adjust to the COVID-19 pandemic and Governor Scott’s “Stay Home, Stay Safe” order. As they reduce hours, terminate employees, and implement furloughs, they are considering how these changes will impact employer-sponsored health insurance.
Most group health plans have eligibility requirements tied to the number of hours that must be worked to remain eligible for coverage. For regular, full-time employees, a reduction in hours or temporary closure may cause employees to fall below the requisite minimum-hour threshold to remain eligible for coverage. If that change in status results in a loss of coverage, an employee will experience a COBRA qualifying event. It is important to note that COBRA is triggered by these hour reductions or separation from employment.
Large employers (50 or more full-time employees) should consider compliance with the Affordable Care Act (“ACA”) and whether employee hour reductions will impact who is considered to be a full-time employee for purposes of the employer insurance mandate. If the employer terminates coverage hastily, these actions could expose employers to the ACA’s “pay-or-play” penalties for failing to offer or maintain coverage for full-time staff, particularly with respect to variable hour employees that are determined to be full-time in a current stability period. The ACA look-back measurement and stability period rules require employers to treat variable hour employees as full-time employees where they have been determined to be full-time for a look-back measurement period. In these cases, the variable hour employees must be treated as full-time employees during the stability period.
Employers will also be faced with decisions regarding how to pay for employees’ health insurance during times when employees do not experience a loss of coverage, but nevertheless, are not receiving a paycheck from which the employer can deduct the employee-paid portion of insurance premiums. In these cases, employers should look to existing unpaid, leave of absence policies and/or the terms of the employer’s Section 125 cafeteria plan that may shed light on the options for employers to make arrangements with the employees to pay for insurance premiums during periods when the employee is not working. Options include making arrangements with the employees for pre-payment of premiums, “pay-as-you-go” with the employee’s non-wage financial resources, or catch-up payments when the employees return to work and start earning wages again.
Before making any changes to the eligibility requirements for health insurance coverage, employers should check with health insurance carriers, stop-loss insurers, third-party administrators, and counsel to ensure that changes are feasible and can be implemented. Changing eligibility without checking with carriers and stop-loss insurers can leave employers with substantial financial exposure.
COBRA Continuation of Coverage and Premium Payments During Leave
Where employees experience a separation from employment or a reduction in hours that results in the loss of health insurance coverage (based on health plan eligibility policies), they experience a COBRA qualifying event. In these situations, employers should follow COBRA protocol and notify employees of their continuation of coverage rights.
Employers can voluntarily assist COBRA-eligible employees or terminated employees with COBRA premiums at any level or for any duration they choose but should consider the following. Where an employer wants to assist terminated employees with COBRA premiums, these arrangements should be made in writing and communicated quickly and clearly to the terminated employees and should clearly identify the level and duration of the benefit the employer is offering.
Where a person remains employed but has a COBRA qualifying event, employer can also assist with COBRA premiums at the level and duration they choose. This should also be communicated in writing to all affected employees. When making these decisions, employers should avoid assisting with COBRA premiums for one group of employees over others and, in particular, should avoid reimbursing COBRA premiums for only highly-compensated employees. Where an employee is expecting to return to work, an employer can enter into an agreement with employees to be reimbursed for the some or all of the COBRA premium upon their return to work.
Retirement Benefit Issues
As employees begin to face disruptions in their work and health due to COVID-19, employers will increasingly field questions about retirement benefits.
If wages and salaries are still being paid to employees, employers must continue to take salary deferrals permitted under the plan unless the employee elects to discontinue. Plans with matching or other employer contributions must continue to fund those contributions, unless the plan is amended to discontinue employer contributions. Some types of “safe harbor” 401(k) plans may face regulatory hurdles discontinuing employer contributions in the middle of a plan year and plan documents should be consulted before these changes are implemented. Some employers have contemplated sending a reminder to employees of their right to discontinue making 401(k) deferrals at any time, so they can maximize current pay. Employers facing temporary closures should ensure that key employees who process 401(k) deferrals from payroll are not laid off, since the U.S. Department of Labor imposes fines on employers who experience delays in funding employee deferrals into their 401(k) plans.
Employers may allow employees who are terminated or on an unpaid leave of absence to delay repayment of 401(k) loans for up to 12 months. However, this 12-month period cannot extend beyond the IRS maximum limits for loan repayment. When the employee returns, the loan must be reamortized or the missed payments and interest repaid in a lump sum. Some plans allow terminated employees to continue paying off plan loans, typically by check or automatic debit from a bank account. Employers should consult with their 401(k) record keeper to determine if this option is available in their plan.
Employers will likely also see an increase in the requests by affected employees for hardship distribution and loans from qualified retirement plans. Generally, federal tax law restricts an employee’s ability to access 401(k) savings until the employee reaches age 59 ½. An exception exists for hardship distributions if there is an “immediate and heavy” financial need to pay for certain types of expenses. While the requirements for each plan may vary, most plans use the IRS’ “safe harbor” list of approved expenses, which includes: medical care, tuition, and other educational expenses, and rent or mortgage payments necessary to prevent evictions.
For more information, or for assistance with other employment or benefit related questions pertaining to the COVID-19 pandemic, please contact Amy McLaughlin (firstname.lastname@example.org), Karen McAndrew (email@example.com), Maggie Platzer (firstname.lastname@example.org) or Kendall Hoechst (email@example.com).