As mandated stay at home orders continue and the unemployment numbers rise, it is clear businesses are making the difficult decision of reducing their workforce. Employers can offer benefits continuation for extended business closures. Reducing hours or putting staff on furlough or other approved leaves of absences will reduce immediate payroll liabilities. But employers need to be aware of the potential benefits implications of their workforce planning and be able to communicate expectations to employees about the plan and how it might affect benefits.
A furlough continues employment, but reduces scheduled hours or requires a period of unpaid leave. In California, if a furlough lasts more than a pay period, all wages and earned vacation time must be paid out at the time of furlough.
Furloughs are a cost saving measure. The thought process is that in the short-term having all employees incur a bit of hardship is better than some losing their jobs completely. Employers use furloughs when there is a specific end date in mind, which can be complicated in a public health emergency like COVID-19 as there is a great deal of uncertainty about when a business might reopen.
The employer gets to decide how to manage health benefits during a furlough. Since furloughs are typically short-term, the employer may continue to share the premium with affected employees. Before you make any decisions consider the following items and how they apply to your benefits. This is by no means an exhaustive list of all issues to consider before final decisions are made related to any short-term or long-term reduction in employee payroll. Each employer must evaluate the issues and is highly recommended to consult with an attorney to find the best options during these challenging times.
Even if you want to extend coverage, eligibility for benefits during a furlough or layoff will depend on the specifics of your health plan. Plan terms typically dictate whether active coverage can continue during short-term leaves of absence, whether paid or unpaid, and many plans have minimum hour requirements to maintain active coverage. Employers that expand coverage for ineligible employees outside the terms of the plan or policy without consent from the insurer or stop loss carrier can result in significant risk and financial exposure.
Cancelling health insurance likely does not make sense in the case of a furlough of a few weeks, but when you're talking about a longer temporary layoff without a clear or anticipated return date, this could make more sense. Employers generally must offer COBRA for all group health plans when there is a loss of coverage because of a termination of employment or reduction in hours. And Employers need to Understand COBRA continuation coverage or state continuation coverage that apply, if any.
Make sure you understand how your payroll system settings might affect employee benefits. An increase in the employee's share of the premium because of a reduction in hours (including making a change to base compensation, as in a furlough) can trigger a loss of coverage for this purpose. Some plans such as Long Term Disability, Short Term Disability and some Life products are dependent on employees salaries, so changing payroll settings will affect benefit contributions and cause the plan to fail. This puts the employer and employee in a bad situation especially if the employer had communicated continuation of coverage.
Terminating the group health plan coverage for an employee when on a leave or furlough begins may cause an ACA penalty for failing to offer coverage to 95 percent of full-time employees. COBRA coverage must remain affordable to avoid an ACA penalty, which may require a continued or increased employer subsidy.
During the COVID-19 crisis, it is difficult for employers to know the specific end date for a furlough or temporary layoff. The newly passes CARES Act gives employers the following options and benefits, which may allow them stay open and keep more people employed:
We encourage you to follow the IRS Coronavirus Tax Relief page and the SBA Coronavirus Loan Resources page, as well as consult with your tax professional or financial advisor.
If you are able to continue cost sharing, you will want to clearly outline logistics for employees to pay their portion of the premium. Assuming you want to keep employees on benefits during a short furlough, remember to confirm with your insurance carrier that you can leave employees on your health insurance if they aren't actively working and discuss other questions with your insurance carrier or broker. If health benefit plans have to be cancelled COBRA will apply.