Paying Health Insurance Premiums for Furloughed or Laid Off Employees
Employers of all sizes in nearly every industry have had to lay off or furlough employees in an attempt to deal with the massive business disruptions caused by the spread of COVID-19. Facing this reality, many employers have asked whether they can pay monthly health insurance premiums on behalf of furloughed employees (those who are expected to return to work fairly soon) or laid off employees (those who may or may not return to work) and, if so, what are the implications of doing so. The short answers to these questions are: yes, premiums may be paid, and the implications dependon the employer’s plan.
ERISA and Federal Income Tax Rules
From the standpoint of federal benefits law, nothing prevents an employer from paying monthly premiums on behalf of furloughed and laid off employees in order to keep coverage in force under a fully insured group health plan. In addition, an employer can choose to pay monthly premiums for one group but not the other. The employer-paid health insurance premium will continue to be excludable from the gross income of the affected workers, because active, inactive and former employees are treated the same under the tax rule that makes available the exclusion of employer-paid premiums from gross income (Code Section 106). We understand that insurance carriers are providing the same answer to their employer group customers and are accepting such premium payments and continuing coverage without interruption. But in light of the COBRA issue described below, employers that sponsor fully-insured group health plans should confirm with their brokers or carriers that coverage will continue without the need for a COBRA election as long as the employer continues to pay the premiums.
The same general rules apply to the payment of monthly premiums for furloughed and/or laid off employees covered by a self-insured group health plan, with two caveats. First, self-insured group health plans are subject to special nondiscrimination rules under Code Section 105(h). Those rules are designed to make sure that highly paid employees do not receive more favorable benefits than non-highly paid employees under the self-insured health plan. If any highly paid employees are among the furloughed or laid off employees who will be receiving employer-paid health insurance premiums, the nondiscrimination rules will come into play (and the employer should consult with its employee benefits legal counsel to assure compliance with the rules). Otherwise, the nondiscrimination rules should not be implicated. Second, the third party administrator of the health plan should be informed of the employer’s intentions to avoid any confusion regarding the payment of claims. Finally, many stop loss carriers frown upon the continuation of health plan coverage – outside of COBRA coverage – for employees whose termination of employment or reduction of hours otherwise would result in a loss of coverage. Those stop loss carriers may refuse to pay claims on the theory that health plan coverage should only be continued after a COBRA election has been made. For that reason, an employer who maintains a self-insured group health plan and wishes to continue the coverage of furloughed or laid off employees without a COBRA election should confirm that high-cost claims will be paid by its stop loss carrier under those circumstances.
As mentioned above, there are COBRA implications to consider when an employer seeks to continue group health plan coverage for furloughed or laid off employees by paying the monthly premiums. In general, an employee who loses coverage under an employer-sponsored group health on account of a termination of employment or reduction in hours must be given the right to continue health plan coverage at her own expense under COBRA (if her employer normally employs 20 or more employees on a typical business day). An employee who is laid off will have experienced a termination of employment, and ordinarily health plan coverage would end on the last day of the month in which the termination of employment occurs (or other date specified by the plan). In that case, an employer who continues to pay monthly health insurance premiums would push out the loss of coverage date for COBRA purposes. For example, the COBRA rights of a laid off employee whose employer covers monthly premiums for two months following the lay-off would arise at the end of the second month because that is when the loss of coverage would occur.
Whether a reduction in hours may result in a loss of coverage depends on the terms of the plan and any pertinent employer policies, including policies that may allow affected employees to maintain coverage for short periods (without having to make a COBRA election). The COBRA regulations state: “If a group health plan measures eligibility for the coverage of employees by the number of hours worked in a given time period, such as the preceding month or quarter, and an employee covered under the plan fails to work the minimum number of hours during that time period, the failure to work the minimum number of required hours is a reduction of hours of that covered employee’s employment.” (Treas. Regs. § 54.4980B-4, Q&A 1(e).) So an employee who is furloughed for just two or three weeks may actually return to work before the reduction in hours results in a loss of coverage, regardless of whether the employer covers the employee’s premium payments for the pay periods that include the furlough. If the furlough lasts for an extended period – more than a month – then there is a good chance that the reduction in hours would result in a loss of coverage, but for the payment of health insurance premiums by the employer.
Recommendations Regarding Implementation
Most health plans contemplate the payment of a portion of the monthly premiums by employees, as do the cafeteria plans that support the payment of employee premiums with pre-tax dollars. For that reason, and in order to make clear the intentions of the employer, we recommend that the employer adopt a written plan amendment or policy describing the temporary waiver of employee contributions and the payment of all or a portion of the premium for furloughed and laid off employees. Such a policy would remain in effect temporarily but would supersede any contrary provision in any benefit plan documents and disclosures while in force. The policy could be rescinded or expire under its own terms when something resembling a normal working life is restored. In addition, as noted, confirmation of the employer’s policy with insurance carriers, third party administrators, and stop loss carriers is recommended.