Furloughed Employees and Group Health Insurance Coverage

Due to mandated COVID-19 precautions, many previously thriving businesses in the Delaware Valley have closed their doors, at least temporarily.  Lots of employers are considering “furloughing” employees whose job responsibilities are contingent on stable business operations.  Some plan to reduce employee hours down to zero for the present time or significantly reduce the number of hours employees work per week. The hope is that life and business will normalize again soon, and that once COVID-19 restrictions end there will be work for these employees to do again. This terrible economic situation has raised many employee benefit plan questions for affected businesses.  We’ve attempted to answer the most common questions below for educational purposes.

Can employees stay on a group health benefits plan if they are not working any hours?

Generally, eligibility criteria spelled out in employee handbooks and ERISA plan documents require employees to be regularly engaged in a certain number of paid hours of service per week or per month to qualify to participate in the group health benefit plan. Hours of service can be defined as work hours, holidays, and approved leave or other occurrences like jury duty. Group health plan contracts with insurance carriers that underwrite the benefit plan typically also require employees to meet hours of service requirements.

“Furlough” is not a term that has legal meaning regarding health and welfare benefit plans. A more appropriate term might be “leave of absence,” which can be voluntary or involuntary. Some group plans may have provisions to address coverage eligibility for employees who are on a leave of absence, and those rules and contract provisions apply in these cases. Another temporary alternative to preserve eligibility status may be for employees to take whatever paid leave they have available.

However, the bottom line is that any employee who does not accrue enough paid hours of service in a given period may be deemed ineligible to participate in their group benefits plan by the plan or carrier. The only way to change that would be a government mandate to ensure plan eligibility or an hour of service modification made to both plan documents and carrier contracts.

If a business is an applicable large employer (ALE), how does the ACA’s employer shared responsibility requirements (employer mandate) apply to furloughed employees?

The Affordable Care Act’s (ACA) employer shared responsibility provisions (ESRP) do not address furloughed employees. The law and its related regulations and guidance only consider employees that are either full-time, part-time, seasonal, or variable hour. ALEs only need to offer full-time employees and their dependent children qualified coverage to mitigate their penalty liability. To determine full-time status, the following definition from 26 CFR §54.4980H-1 applies:

The term hour of service means each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer; and each hour for which an employee is paid, or entitled to payment by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.

Under this definition, an employee who does not accrue hours of service in a given month is not an employee for the purposes of the ERSP, so they do not need to be offered qualified coverage.

A related issue is that “furloughed” employees may be in an ACA stability period. According to 26 CFR §54.4980H-3(d)(1)(i),

“If the applicable large employer member determines that an employee was employed on average at least 30 hours of service per week during the standard measurement period, then the applicable large employer member must treat the employee as a full-time employee during a subsequent stability period, regardless of the employee’s number of hours of service during the stability period, so long as he or she remains an employee.” 

This language makes it clear that if an employee in a stability period accrues any hours of service in a given month, then the law stipulates the employee must be treated as a full-time employee during that month for coverage purposes. However, if the person accrues no hours of service in a month, then they are not an employee, and the stability period requirement does not apply.

Finally, if an ALE rehires a former employee, the employer must then follow the 26 CFR §54.4980H-3 rules related to rehired employees.

Is there any federal relief available for employers to help keep furloughed employees on a group benefits plan?

The newly passed Families First Coronavirus Response Act (H.R. 6201) requires employers with 500 or fewer employees to provide ten days of emergency paid sick leave and 12 weeks of expanded and paid Family Medical Leave Act protections to qualified employees for specific circumstances related to COVID-19. In addition to providing applicable employers with refundable social security tax credits to offset the costs of each employee’s paid leave, the law specifies that the employer’s tax credit(s) will be increased by the portion of the employer’s group health plan costs attributable to the paid leave, to the extent such amounts are excluded from the employees’ gross income. These new tax credits and paid leave requirements may help some employers delay planned furloughs and continue to provide health coverage to employees who are taking either type of the new federal paid leave.

It is also important to note that only two economic relief measures related to the COVID-19 pandemic have become law so far.  At least one more economic relief measure is planned. There is precedent for future legislation to provide employees and employers with health coverage assistance. In February of 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA created premium reductions and additional election opportunities for health benefits under COBRA and state continuation of coverage laws.

Do furloughed employees qualify for COBRA?

If employees covered under a group health plan subject to the federal Consolidated Budget Reconciliation Act’s continuation of coverage provisions (COBRA) have their hours reduced to the point that they are no longer eligible for the group benefits plan, then they qualify for COBRA benefits.  Spouses and dependents qualify as well.

Termination of a covered employee’s employment for any reason other than “gross misconduct” also makes the employee and their spouse and dependents eligible for COBRA continuation of coverage benefits.

Plans must give each qualified beneficiary at least 60 days to choose whether or not to elect COBRA coverage. The election period begins on the date the election notice is provided, or the date the qualified beneficiary would otherwise lose coverage under the group health plan due to the qualifying event, whichever is later.

If an employer group health plan terminates because the company goes out of business, COBRA benefits no longer apply.

Can furloughed employees who work for small businesses that do not have to comply with COBRA qualify for continuation of coverage benefits?

COBRA generally applies to all private-sector group health plans maintained by employers that had at least 20 employees on more than 50 percent of its typical business days in the previous calendar year. For employees of smaller businesses that are not subject to COBRA, state laws may provide continuation of coverage benefits.  These laws are often called “Mini-COBRA” or state continuation requirements.

The small employer continuation of coverage requirements for the states in our area are as follows:

Delaware: The Delaware mini-COBRA law applies to fully-insured plans of employers that employed between 1 and 19 employees on a typical business day during the preceding year.  Qualifying events include termination of coverage other than for gross misconduct or a reduction in hours. The coverage is only available to a covered employee or eligible dependent who has been continuously insured under the group policy or for similar benefits under any group policy that it replaced during the entire 3-month period ending with the qualifying event. Each covered employee or eligible dependent must notify the plan administrator or its designee of its election within 30 days of getting notice of their qualification for benefits. The coverage is effective as of the date of the qualifying event and can last as long as nine months. If employment is reinstated during the continuation period, then coverage under the group policy must be reinstated for the covered employee and any eligible dependents who were covered under continuation.

New Jersey: Any New Jersey small employer (2-50 eligible employees) that purchases a New Jersey health benefits plan to cover its employees is subject to the state continuation law unless the small employer is subject to COBRA. Terminated employees and employees whose hours of employment are reduced to less than 25 hours per week have the option to continue coverage for themselves and their qualified dependents. The employee must make a written election for continued coverage within 30 days of a qualifying event. Employees and dependents who qualify for New Jersey continuation coverage due to termination or reduction in hours can receive up to 18 months of health coverage.

Pennsylvania:  Act 2 of 2009 allows eligible employees of small businesses with 2-19 employees who receive health insurance from their employers to purchase health insurance through their former employer for nine months after their employment ends for themselves and their dependents. The covered employees and eligible dependents must have been continuously insured under the group policy or a similar policy which it replaced, for at least three consecutive months ending with the employee’s termination. Termination of employment (either voluntary or involuntary, but not for the employee’s gross misconduct), as well as a reduction in hours, are qualifying events. The employee or employee’s dependent must give notice to the plan administrator (who may be the employer) of his or her election within 30 days of receiving notification of the qualifying event.

If an employer group health plan terminates because the company goes out of business, state continuation benefits generally no longer apply.

Do furloughed employees qualify for a special enrollment period (SEP) to enroll in individual market coverage?

Losing employment-based health coverage allows an employee and their spouse and dependents to enroll in individual health insurance coverage, including through their state’s health insurance exchange marketplace. This special enrollment period lasts for 60 days. People who opt for exchange marketplace coverage may qualify for cost-sharing reductions and a tax credit that lowers monthly premiums. The marketplace enrollment process also will determine if the employee and any dependents qualify for free or low-cost coverage through Medicaid or the Children’s Health Insurance Plan.

Being offered COBRA continuation coverage does not limit eligibility for coverage or a premium tax credit through an exchange marketplace. The employee or dependent just must select exchange coverage within 60 days before or after the loss of other coverage, or they will have to wait until the next open enrollment period.

One exception, however, is if an employer decides to contribute to COBRA premiums for a given period of time (e.g. three months).  Healthcare.gov specifies that loss of the employer’s contribution towards COBRA premiums grants an SEP.

Content provided by our partner, KT Benefits.