NOTE: Because the COVID-19 situation is dynamic, with new governmental measures each day, employers should consult with counsel for the latest developments and updated guidance on this topic.
There are many more than 10 issues that are of concern to employers in connection with the current crisis. Nevertheless, employers are dealing with certain recurrent matters. This article focuses on the more common benefits-related challenges employers are facing, how these challenges are being addressed, and the issues that require resolution.
1. What are employers doing regarding health plan eligibility during a furlough period?
A main employer concern is providing health care to employees who will be furloughed. There are many issues of which an employer must be cognizant before providing coverage. First, the employer’s plan document must be reviewed to see how furloughed employees are to be treated. Generally, furloughed employees can be viewed as employees on an unpaid leave. It would not be surprising to find that there is no provision in the plan document or summary plan description that clearly deals with this issue. If these documents are silent on the matter, or if the documents do not provide for the desired level of coverage, the employer should take the following actions prior to extending coverage to furloughed employees:
- Amend the plan to provide for the desired coverage.
- Procure from the insurer (or stop-loss carrier if the plan is self-insured) written permission to provide this coverage to furloughed employees. Failure to procure written permission could result in an insurer disclaiming coverage.
A key component to determining if those on a furlough are covered by a plan is the manner in which full-time employees are determined under the Affordable Care Act employer mandate. Generally, if the employer uses a “lookback/stability” method for determining full-time status, then generally, furloughed full-timers will be extended coverage until the end of the employer’s stability period. If the employer measures full-time employment on a monthly basis, the coverage could end for the employee at the end of the month that begins the furlough.
The plan may need to be amended to provide additional coverage for furloughed employees.
2. Can employers subsidize premium payments?
Generally, employers can subsidize coverage. They must, however, be cognizant of the following issues:
- Cash paid directly to employees will be taxable as wages.
- Nondiscrimination rules may impact self-insured plans.
- Employment laws (e.g., FMLA and USERRA) may affect the amount of the subsidies.
3. What should employers advise furloughed employees with respect to benefits they have elected?
A furlough may impact employee rights relating to benefits the employees elected at their last open enrollment. So, too, may the diagnosis and care associated with COVID-19. Specifically, there may be the ability of those who have made certain elections to change those elections. Employers may wish to consider advising employees of their rights to change certain benefits. These include:
- Dependent Care Spending Accounts – both non-furloughed and furloughed employees may be able to change elections on account of daycare centers closing as well as a change in employment status.
- Healthcare Flexible Spending Accounts – it might be more advantageous for furloughed employees if employers terminate participation in the FSA and allow furloughed employees to elect COBRA for the spending account.
- Qualified Transportation Expenses – both non-furloughed and furloughed employees may wish to change these elections while they are not commuting to work locations. These elections generally may be changed at any time.
4. Can an employer provide life insurance and long-term disability insurance to furloughed employees?
Many employers desire to extend coverage of life insurance and long-term disability insurance to furloughed employees. Employers generally must contact insurers to negotiate an end date for this coverage. Insurers generally will only extend coverage for a limited period of time during the furlough period. There may be conversion privileges for those losing coverage.
5. Can employers change their contributions under qualified retirement plans?
Employers often wish to suspend matching and other employer contributions to 401(k) or 403(b) plans. The ability to suspend matching contributions mid-year may be subject to a variety of factors. These include:
- If the plan is a “safe harbor” plan, the safe harbor notice that was distributed to employees before the beginning of the plan year must be examined as it may permit the plan to be amended to reduce matching contributions mid-year.
- A safe harbor plan also may be amended mid-year if the employer is experiencing an “economic loss.”
- The determination of whether a non-safe harbor plan can be amended depends upon a number of factors, including:
- Whether contributions are allocated periodically or annually.
- Whether the plan has a “last day” or 1,000-hour rule as an eligibility condition for a matching contribution.
- Depending upon plan language and communications made to employees, some 2019 discretionary non-elective and matching contributions need not be made in 2020.
- Certain contributions that employers have committed to make may be deferred until the employer’s tax filing deadline.
Special 2019 Contribution Considerations
With respect to a 401(k) plan, is it permissible to forego making employer contributions for the 2019 plan year?
The answer depends on the plan’s terms and any communications made to plan participants regarding employer contributions. If the plan’s language defines an employer contribution as “discretionary” (regardless of whether the contribution is an employer match or an employer non-elective contribution) and the company/plan has not made ANY representations to plan participants (verbal or written) that a contribution will be made to the plan on their behalf for the 2019 plan year (for example, a communication that informs participants that the company will match employee deferrals for the 2019 year at a certain percentage), then the company has the discretion to NOT make an employer contribution for the 2019 plan year. Otherwise, if the plan’s terms require a contribution to be made or the company/plan previously communicated to participants that an employer contribution would be made, then once the 2019 plan year has ended (or once any conditions precedent regarding the employer contribution have been satisfied), the employer contribution is deemed to have “accrued” and must be made in order for the plan to maintain its tax qualified status.
One area where employers are making changes affecting employee deferrals is automatic deferrals. Some employers now question whether in this economically uncertain time, they should be deferring employee pay without procuring an affirmative consent.
6. How can a reduction in force create a partial plan termination?
Employers must be cognizant of partial plan termination rules when making reductions in force.
- A reduction of 20% of plan participants may create a partial plan termination, which would require the vesting of all plan participants whose jobs are terminated during the year of the reduction.
- A partial plan termination must be communicated to affected employees.
7. Can plan distributions be made to furloughed employees and those affected by COVID-19?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act permits a plan to be amended to provide furloughed employees and others affected by COVID-19 to receive penalty-free plan distributions of up to $100,000, which may be repaid within three years of the distribution. If amounts are unpaid within three years, there will be ratable income from the year the distribution is made for the three-year period.
8. How does the CARES Act provide more flexibility regarding plan loans and required minimum distributions?
The CARES Act allows a plan to be amended to receive plan loans as high as $100,000 or if less, 100% of a vested plan account balance.
Additionally, the CARES Act waives minimum required distribution plans for 401(k), 403(b) and governmental 457(b) plans.
9. Can employees donate paid time off to their colleagues who are absent from work due to a medical emergency or a major disaster?
An employer may establish a paid time off (PTO) donation plan. Under the PTO donation plan, employees may elect to donate PTO hours. The employer converts the PTO hours and holds them in a PTO bank. Employees who (i) have a medical emergency, or they or their family member(s) have a medical condition that will require their absence from work that will result in a substantial loss of income because all of their PTO has been used or (ii) are impacted by a major disaster as declared by the president of the United States, may apply to the employer’s PTO bank for payment of donated PTO. The donated PTO is converted at the employee’s hourly rate and is paid to the employee as if it were regular PTO. The PTO is subject to normal income and employment taxes. The employee who donates the PTO is not subject to income tax on the donated amounts as this is deemed an exception to the income tax doctrine known as assignment of income. Care must be taken as the requirements are far more extensive than typically found in a payroll policy.
10. May an employer make “qualified disaster relief payments” to employees?
An employer may make qualified disaster relief payments to employees. In addition, an employer may establish a private foundation that will make the payments to the employee. The payments made by the employer are deductible and the employee will not be subject to income tax or most employment taxes if the relief payments are in conformity with Section 139 of the Internal Revenue Code.