COVID-19: Health Plan Coverage for Furloughed Employees

<p>ERISA and Employee Benefits Client Alert</p>

COVID-19: Health Plan Coverage for Furloughed Employees

Due to the sudden and dramatic slow-down of the global economy caused by COVID-19, many employers are having to make difficult decisions regarding their workforce. In addition to layoffs, this includes reducing employees’ scheduled hours or completely furloughing employees. Termination of employment will result in a loss of coverage and generally entitle those former employees to continuation coverage under COBRA. However, furloughed employees present other challenges. In particular, can the employer allow furloughed employees to remain eligible for coverage under the employer’s health plan? There are several important issues employers must consider.

Large Employers: Is there a stability period at issue? Employers with 50 or more full-time equivalent employees (“Applicable Large Employees”) are required by the Affordable Care Act (ACA) to offer qualifying and affordable coverage to 95% of its full-time workforce or be subject to the ACA’s employer mandate penalty. A full-time employee is one who works at least 30 hours per week or 130 hours per month. Because the hours for some employees vary, employers are allowed to measure full-time status for such employees in one of two ways.

  • Under a “monthly measurement method,” an employer reviews the hours an employee works on a monthly basis to determine if the employee works 30 hours per week or 130 hours per month. Employees who drop below this full-time threshold, including through furlough, will lose coverage after the month in which the hours are reduced below 30.
  • Under a “look-back measurement method,” the employer determines full-time status retroactively during a determined measurement period based on the employee’s hours of service during that period. If the employee averaged 30 hours per week or 130 hours per month during the measurement period, that employee would be eligible for coverage during a set “stability” period. For example, if the employer uses a 12-month measurement period and a 12-month stability period, and the employee averages 30 or more hours per week during the measurement period, that employee must be offered coverage for the entire duration of the stability period—even if that employee starts working less than 30 hours per week during the stability period.

Thus, for any employees subject to a stability period whose hours are significantly reduced or who are completely furloughed, the employer will need to continue providing coverage to those affected employees for the duration of the stability period. However, coverage would end when the stability period ends, but sooner if the employee is later terminated of fails to pay the employee share of premiums (discussed below).

Small Employers: What does the plan say? Employers who have fewer than 50 full-time equivalent employees are not subject to these requirements for determining full-time status. Those employers will need to review the terms of their plans to determine whether an employee on a reduced schedule or who is completely furloughed will remain eligible for coverage under the plan.

Can you amend the plan’s eligibility terms? If an employer wants to cover employees under the plan who would otherwise lose coverage due to a reduction in hours or complete furlough, the employer will need to amend the terms of its plan. For example, a plan could be amended provide for special eligibility for employees who are furloughed due to the COVID-19 pandemic and treat them as being under an approved temporary leave of absence. Before amending its plan, the employer needs to check with any insurance carriers involved. For example, a plan that is fully-insured will need to check with its health insurance carrier for any such amendments. Carriers will decline to pay claims for employees who are not eligible and may pursue the employer and the employee for reimbursement of claims that were incorrectly paid for ineligible employees. However, in response to COVID-19, some carriers have announced that some furloughed employees will be eligible for coverage if requested by the employer. A plan that is self-insured has greater flexibility in amending its plans, however, it is important for employers with self-insured plans to contact their stop loss insurance carrier prior to implementing any such change. Without approval from the employer’s stop loss insurance carrier, an employer changing eligibility terms would have full financial responsibility to pay all the claims incurred by such employees. This would put an employer at significant financial risk—especially in a pandemic situation where there could be an increase in claims. 

How are the premiums paid when there is no paycheck? Even if a furloughed employee can stay on the plan due to the stability period or a plan amendment, the employees’ share of the premium must still be paid. Because the employee’s share of health plan premiums is collected through payroll deductions, the employer will need to communicate this with employees and collect premiums in one of three ways: (1) have employees prepay premiums, (2) have the employees pay monthly as they go, or (3) have the employees pay premiums when they return to work. All of these options are difficult. The third option in particular would require employers to front the premium cost for employees until they return to work, but the employer may need to eventually terminate that employee. While it would be difficult for most employees to pay the employer back for several months of premiums, this would be especially difficult in a slow economy. For these reasons, some employers might consider paying both the employer and employee share of premiums for some period of time. For example, the employer might agree to pay the full amount of the furloughed employee’s premium for a set number of months, and then determine whether the employee can return to work or that the employer will terminate the employee. Termination would then trigger continuation coverage under COBRA.

How can COBRA help in these situations? Loss of coverage due to a reduction in hours or termination of employment is a COBRA qualifying event that allows plan participants to continue coverage under the plan (typically for 18 months). Federal COBRA applies to employers with 20 or more employees, however, most states now have their own COBRA laws (known as “Mini COBRA” laws) that require employers with fewer than 20 employees to also offer continuation coverage. This includes Arizona, California, Colorado, and Nevada.

Under COBRA laws, the employee is responsible for the full amount of the premium—both the employee and the employer share. This is often cost-prohibitive for the employee, so to help employees during these difficult times, employers can offer to pay all or a portion of the full premium for some period of time. Severance agreements often provide for some coverage of COBRA premium coverage. When an employer pays the premiums directly to the plan, it is not taxable income to the employee (or former employee).

Rather than amending its plan to ensure that furloughed employees stay eligible and having to worry about collecting premiums from those eligible employees who are not receiving a paycheck, employers may choose to follow this COBRA path for furloughed employees. If economic conditions change such that the furloughed employee later returns to work, the employee may again be eligible for coverage under the plan.

Conclusion: These unprecedented times are requiring employers to make very difficult decisions regarding their workforce. In many cases, employers need to furlough employees to reduce costs until the economy recovers, but they also want to provide some form of protection to their valued employees. The available methods of doing so will depend on the size of the employer, the terms of its plan, whether its plan is fully insured or self-insured, and what the employer’s goals are for getting through this situation.

Employment and benefit issues surrounding the COVID-19 virus continue to evolve. Should you have questions regarding this Alert or other benefit or employment issues related to COVID-19, please contact a member of Fennemore’s ERISA and Employee Benefits Practice Group, Labor and Employment Practice Group, or one of its health care attorneys.