Do Benefits Continue During Furloughs? It’s a Matter of Plan Interpretation
As a growing number of states implement actions to limit the spread of COVID-19, some employers are weighing the need to take some type of workforce action. Which path to take will depend on the organization’s unique situation, and it’s critical to understand the important consequences of each for your workforce strategy. In this article, we’ll focus on furloughs versus layoffs in terms of the impact on continuation of benefits coverage.
Generally, layoffs result in a termination of employment and a loss of benefits. That will trigger benefit continuation requirements like COBRA for health benefits and conversion and portability for some insured employee paid benefits. In contrast, a furlough is a temporary unpaid leave from work, usually for a set period. Furloughed employees may remain eligible for health and other benefits coverage. You’ll need to dig out those plan documents to confirm.
Start by looking at the eligibility provisions for each benefit. For most benefits, eligibility is typically based on “regularly scheduled” hours. Health benefits may use the Affordable Care Act’s lookback measurement method. In defining “regularly scheduled,” for self-insured plans, it is usually within the employer’s discretion to interpret the plan to determine whether furloughed employees are no longer “regularly scheduled” to work the minimum hours and lose eligibility, or remain eligible due to an extraordinary circumstance that doesn’t change the furloughed employees’ regular schedule. If you take the more expansive view that coverage continues, you should make sure that your insurer of the benefit or stop loss vendor (if your health plan is self-funded) agrees with this interpretation. If you determine health coverage should be terminated due to a reduction in hours, COBRA continuation coverage must be offered. For insured non-health benefits, if coverage terminates, conversion or portability requirements may apply, and will vary by specific benefits.
In the case of a lookback-type eligibility standard for health benefits, those furloughed employees who are in a stability period and required to be treated as full-time should be allowed to retain their affordable, minimum value health coverage for the remainder of that stability period, so the employer can avoid the potential for employer shared responsibility paymentswith respect to these employees.
Regardless of the standard you use for health benefits, if you determine that coverage continues during furlough, you may require the employee to continue to pay their required contributions. The required method of payment arguably should follow the same rules as the other unpaid leave policies (e.g., pay-as-you-go or catch-up upon return from leave). How you handle required contributions for non-health benefits, especially benefits where employees pay the entire premium, will also need to be addressed.
If you decide to be more generous by expanding eligibility or paying for coverage while on furlough, you should obtain approval from any applicable carrier or stop loss vendor before expanding eligibility, amend the plan document and SPD, and communicate the changes to impacted plan participants.
If you need to reduce benefits out of business necessity, even if your plan documents require continued coverage for furloughed employees, you should consider the following:
- COBRA continuation coverage must be offered;
- Conversion and portability may need to be offered for insured benefits like group term life insurance;
- Termination may increase exposure to employer shared responsibility payments;
- Amendments to the plan document and SPD are necessary; and
- Impacted plan participants must be notified of the reduction in benefits according to ERISA’s requirements.
The direction you ultimately choose to take will not only have financial implications, but may also raise administrative regulatory concerns. Mercer can work with you and your carrier to resolve those concerns.