This set of FAQs is part of a series dealing with the impact of COVID-19 on businesses. Government-mandated protocols and social distancing directives as a result of the COVID-19 pandemic have led to significant business interruptions and tremendous financial strain on employers. These measures may continue to disrupt businesses and the economy for the foreseeable future. As a result, employers are faced with difficult choices regarding their employees–including how to keep them working during this unprecedented time and for many employers, possibly reducing employees’ hours, furloughing employees, or terminations–all of which can directly affect retirement plans and other types of employee benefit plans. In addition, a wave of new federal legislation affecting employee benefit plans, much of which is intended to provide relief to employees, is being rolled out. This set of Q&As addresses some of the most common health and welfare plan issue questions that arise as employers make business and staffing decisions in response to COVID-19. Other Q&As addressing workforce reduction options, what to do when an employee is diagnosed with COVID-19, deferred compensation arrangements and retirement plans in light of COVID-19 are available here. 

Note that for purposes of this Q&A, we are using the term “furlough” to mean an employer-mandated unpaid leave of absence—that is, a period of time during which employees are available for, but are not actively at work due to instructions from their employer not to be working and during which they are not paid.

If we lay off (terminate) employees due to the pandemic, what happens to their health and welfare benefits?

The same rules would generally apply as in a normal termination of employment, subject to any plan terms to the contrary. The termination of employment would be considered a “qualifying event” under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (COBRA), with respect to employer-provided group health plan (e.g., medical, dental and vision) coverages, provided it results in a loss of coverage. Any qualified beneficiaries (the employees and their spouse and/or dependent child(ren) participating in the plan the day before the termination of employment) should be given timely notice of their rights to elect COBRA.

In addition, employees may elect to continue to participate in any health flexible spending accounts under COBRA for the remainder of the current plan year, but only if they have elected to contribute more money for the plan year than they have taken out in claims (to the extent they qualify as “excepted benefits”).

For other welfare plan coverages (e.g., life insurance, long- or short-term disability), the terms of the applicable policies generally will govern (for example, some may require the employee to be “actively at work” to continue to receive coverage). There may be conversion and/or portability rights available under the policies if eligibility for coverage is lost, and care should be taken to ensure that any such rights are promptly communicated to impacted employees (the employer should be clear on whether the applicable notice obligation is the employer’s or the insurer’s).

If we lay off (terminate) employees due to the pandemic, can we decide to pay a portion of their COBRA continuation coverage?

Yes, you may decide to subsidize all or a portion of the employees’ COBRA premiums for a certain amount of time after a pandemic-related reduction in force, but you are not legally required to do so. If you do decide to explore this option, we recommend that you consult with counsel for guidance. This is because the later loss of the COBRA subsidy is not a special enrollment event that would legally entitle the impacted qualified beneficiary(ies) to enroll in another (e.g., the spouse’s) group health plan; also, the loss of the COBRA subsidy may or may not constitute a special enrollment event in Affordable Care Act (ACA) Marketplace plans.

If we lay off (terminate) employees due to the pandemic, what happens to their Health Savings Accounts and Dependent Care Accounts if we decide to pay a portion of their COBRA continuation coverage?

Employees can keep their health savings account balances, as those are employee-owned.

The funds in a dependent care flexible spending account (also commonly called a dependent care assistance plan, or DCAP) that are not used to pay claims according to the cafeteria plan’s terms (i.e., for eligible dependent care expenses incurred before the termination date; or, for plans that include a post-termination spend-down provision, before the end of the year) would be forfeited by the employee. It should be noted in any event that only “employment related expenses” (within the meaning of Section 21 of the Internal Revenue Code) are eligible for reimbursement—generally, this means that the expense is eligible for reimbursement to the extent it permits the employee and the employee’s spouse, if married, to be working or actively looking for work. The rules applicable to eligible dependent care expenses are complicated, and, while employers should generally avoid giving tax advice to employees, they might refer employees to IRS Publication 503 for guidance.

If we reduce employees’ hours due to the pandemic (but do not furlough them), what happens to their health and welfare (and related) benefits?

If an employee loses coverage under the group health plan (e.g., medical, dental and vision) coverages because of a reduction in hours per plan terms, that is also considered a “qualifying event” under COBRA, and the same rules generally apply as discussed above with respect to terminations of employment. In this case, the loss of coverage need not occur concurrently with the reduction of hours to be considered a qualifying event (the loss of coverage can occur after the qualifying event).But, unless your plan has been amended to start the clock on the 18-, 29- and 36-month maximum COBRA continuation periods on the date coverage is lost, the COBRA period and COBRA notice obligations apply as of the date of the qualifying event (the reduction of hours), not on the date of the later loss of coverage. (Any such amendment should be coordinated with all applicable insurers, including the stop-loss carrier of a self-funded plan.)

Example: Your plan (which is not amended to adopt the rule described in the paragraph above) provides that employees must work at least 30 hours per week to be eligible for coverage, but allows employees working at least 20 hours per week to remain covered for 90 days without loss of coverage. If an employee does not return to 30 hours per week at the end of the 90 days, he or she will be terminated from coverage. In this case, if an employee does not return to 30 hours per week at the end of the 90 days, the COBRA qualifying event occurred (and the COBRA period began to run) on the date the hours were first reduced, not on day 91, and the clock for providing applicable COBRA notices will start counting as of the date of reduction of hours.

However, if an employee does not lose coverage under the terms of the group health plans (for example, because the plan covers full-time and part-time employees), they would continue to remain an active participant in the plan. If their pre-tax earnings are no longer sufficient to pay for the premiums for the group health plan, you may want to consider options to allow them to pay for the premiums some other way. Keep in mind that reductions in W-2 wages may adversely impact your affordability calculations under the ACA (for employers using the Form W-2 wages safe harbor method for determining affordability).

As with a termination of employment, if an employee loses coverage under the group health plans because of the reduction of hours, they may be able to continue to participate in any health flexible spending accounts under COBRA for the remainder of the current plan year, assuming their accounts have a positive balance.

The ability to continue to participate in other welfare plan coverages such as life insurance or short- or long-term disability will depend on the terms of the applicable policies. Refer to the discussion applicable to a termination of employment, above.

If we furlough employees due to the pandemic, what happens to their health and welfare benefits while on furlough?

It depends on the terms of the individual plans and policies, which you will want to review. If the plans define eligibility based on being “actively at work,” or working a specified number of hours per week, the employees may lose eligibility for coverage under the plans, particularly in the case of unpaid, non-FMLA leaves of absence. You can change these default eligibility terms if you so desire (see next question), but will want to work with your insurer (for fully-insured plans) or stop-loss carrier (for self-funded plans) to do so.

However, for medical coverage, if the plan’s eligibility provisions are designed to correspond with the ACA so that employees are eligible only if they work an average of at least 30 hours per week, determined using the lookback method for determining eligibility, you may be obligated to offer the employee coverage for an additional length of time (e.g., for the remainder of the current stability period) to avoid exposure to ACA employer shared responsibility penalties for those months, even once their status changes.

If group health plan coverage is lost due to the furlough (a reduction of hours), then COBRA rights (and notice requirements) will apply (see discussion above). If eligibility for other insured welfare coverages is lost, then conversion and/or portability rights may apply—refer to the discussion applicable to a termination of employment, above.

You may also want to review your leave of absence policies for other unpaid, non-FMLA leaves to determine how you handle similar types of leaves of absence, or to make conforming changes to those policies in line with any changes made to eligibility terms.

Can we continue coverage for furloughed workers?

Yes, subject to the approval of the applicable insurer or stop-loss carrier. Employers may amend their plans to extend active employee coverage to furloughed employees and to allow furloughed employees to continue to contribute to health flexible spending accounts to cover qualified medical expenses incurred during the period of furlough. However, for fully-insured welfare benefits, the insurance company must consent to the plan amendment. If instead, the plan is self-funded and the employer has stop-loss insurance, the stop-loss carrier must consent to the plan amendment.

Can we subsidize or waive employees’ premiums during a furlough, with or without the intent to recoup them upon return from the furlough?

Yes, you may pay the cost of the employee premium during the furlough. If the change results in a reduction in the cost to the employee, the cafeteria plan election change rules, if adopted in your cafeteria plan, will permit you to automatically change their elections to correspond with such changes (similarly, the start of and return from an unpaid leave—as changes in employment status—are permissible status change events that would permit election changes under the cafeteria plan rules).

If you are not waiving the premiums, you may recoup the amount paid when the employee returns from the furlough, allow them to pre-pay, or bill them directly (pay-as-you-go) for premiums. However, FMLA generally requires that the options provided for payment of premiums while on FMLA leave be at least as favorable as the options under any non-FMLA leave, so you will want to coordinate the forms of payment available under your FMLA leave policy with the forms available under this non-FMLA leave.

You will also want to ensure that the plan documents are amended to allow for whatever payment options are selected, and the approach(es) should be confirmed as acceptable to the applicable insurer(s).

If we amend our welfare plans in connection with the pandemic, when are we required to provide notice to participants?

The best practice is to notify participants of the changes as soon as possible.

Under ERISA, the general rule provides employers 210 days after the end of the plan year in which the modification is made to notify participants unless the change is a material reduction in covered services or benefits under a group health plan, in which case an employer has 60 days to provide the notice.

However, the ACA supplements those disclosure rules and requires 60 days’ advance notice for any mid-year medical plan changes that are material modifications affecting the content of the Summary of Benefits and Coverage (SBC). For these purposes, “material modifications” are defined as any change (enhancement or reduction) to a plan’s coverage that independently, or in connection with other changes taking place at the same time, would be considered by the average plan participant to be an important change in covered benefits or other terms of coverage.

If employees take advantage of the expanded FMLA leave available under the FFCRA, what happens to their health and welfare benefits?

As discussed, the Families First Coronavirus Response Act (FFCRA), imposes paid and unpaid FMLA leave mandates on certain private employers, and permits employees to take up to 12 weeks of FMLA leave due to a “qualifying need related to a public health emergency.” This means that, as under the normal unpaid FMLA leave scenario, group health plan coverage must continue during the leaves of absence, subject to the employee’s payment of their share of the premium. In that case, employees would be allowed to continue active group health plan coverage at the normal employee rate. Coverage for other welfare benefits will be determined based on the plan terms and employer’s FMLA leave policy.

If health and welfare coverage is terminated during the furlough, how is eligibility determined upon return?

It depends upon the length of the furlough and the terms of the plan.

However, for purposes of medical coverage offered under the ACA, if an employee did not work any hours of service for a non-educational organization employer for at least 13 consecutive weeks before resuming services, he or she will be treated as having terminated employment and having been rehired. In other words, the employee will be treated as a new employee under the lookback method under the ACA employer-shared responsibility rules.

If the leave is less than 13 consecutive weeks, then for purposes of using the lookback method of determining eligibility, you are allowed to exclude any “special unpaid leave” in determining average hours. However, “special unpaid leave” does not currently include a pandemic-related furlough, but is limited to FMLA leave (which would include the expanded FMLA leave under the FFCRA), USERRA leave, and leave for jury duty.

Does HIPAA’s privacy rule apply to health plans in the COVID-19 context?

Yes, the normal HIPAA rules, including the privacy rule, apply to group health plans as covered entities. Presently, there has been no COVID-19 specific guidance relating to health plans—only a new rule by the U.S. Department of Health and Human Services granting healthcare providers greater flexibility for HIPAA compliance in telehealth. HIPAA applies to information from the group health plans and generally cannot be shared with the employer for employment-related purposes. Additionally, the “minimum necessary” rule always applies. However, there are certain exceptions in HIPAA for use and disclosure.