The Impact of The CARES Act on Employee Benefit Plans: Part Three, Health and Welfare Plan Eligibility

What is the Impact of the CARES Act and COVID-19 Pandemic on Employee Benefit Plans and What Should You Do Now? Part Three: Health and Welfare Plan Eligibility

Last week we gave a few tips to help you know what to do if you decide to make changes to your retirement plan loan and distributions provisions or eliminate or modify the contributions to your retirement plans. We also talked about the effect of layoffs and furloughs on the administration of retirement plans.

Today, let’s discuss examining health and welfare plan eligibility.

 

Examine Health and Welfare Plan Eligibility

Employers need to be aware that the commonly used terms, “layoff” and “furlough,” have no precise meaning for employee benefit purposes. A “layoff” generally means a temporary separation from payroll with the employer intending to recall the employee at some point in the future when work is available. A layoff is usually considered to terminate the employment relationship and laid-off employees are usually eligible for unemployment benefit. A “furlough” generally means that an employee is required to work fewer hours for lower pay or to take a period of time off on an unpaid basis. A furloughed employee is usually considered to remain an employee. But we see employers use the terms in different ways.

Insurance contracts (and related plan terms) for employer-sponsored health and welfare plans often define eligibility for coverage by “active” employee status (typically based on the number of hours per week worked). Unless an insurance contract specifically provides that inactive employees will be covered, an employer that promises laid-off or furloughed employees health insurance benefits may find itself self-insuring those benefits when the insurer refuses to cover those nonactive employees.

The terms of the plan, including any insurance policies, will determine whether the employee remains eligible upon a layoff or furlough. We note that in light of the COVID-19 crisis, many insurers are now routinely approving benefit continuation for inactive employees. However, the plan sponsor may be able to amend these plan documents and insurance contracts (with the insurer’s consent) to revise eligibility to extend coverage to inactive furloughed employees if desired.

If an employee maintains eligibility for health plan benefits during a layoff or furlough, the employee will need to submit premiums on an after-tax basis. However, the employer can waive or subsidize premiums for furloughed employees (must be nondiscriminatory on a compensation basis if self-insured health benefits).

In addition, many life insurance and long-term disability insurers are waiving “actively-at-work” requirements for a limited time. Employees that lose coverage as a result of layoffs or furloughs may have the right to convert the employer-provided coverage into an individual policy.

 

What Should you Do Now?

• You should confirm that the current health plan documents and insurance contracts already cover inactive employees or discuss possible amendments of your health plan documents with your insurers and stop-loss carriers, as applicable, if it wishes to continue to cover inactive employees under plans and insurance policies that do not currently offer coverage to inactive employees.
• If furloughed employees remain covered under your health plan, you need to coordinate with the inactive employee how to collect the premiums for continued coverage to the extent not waived by you.
• If you want to offer employees who will be terminated the right to maintain any employer-provided life insurance and long-term disability benefits, you should contact their insurers to negotiate the terms of any extension of coverage to the individual employee.

 

Part 1: Part One, Retirement Plan Loan and Distribution Rules

Part 2: Effect of Layoffs and Furloughs

Part 4: Analyzing COBRA Coverage Rules and ACA Information Reporting