Dykema has launched a COVID-19 Resource Center to keep our clients up to date on the most recent legal, business and health guidance surrounding the novel coronavirus and how to navigate their businesses through uncertain times. Various firm practitioners are providing timely content that aims at providing guidance for employer’s current issues as well as those unforeseen items that have yet to arise. The site is continually being updated, as state and federal authorities provide guidance on a rolling basis.
This client alert provides answers to common benefit-related questions that we are receiving from our clients. Statutory and regulatory intervention is rapidly evolving and likely will impact our guidance below. Check-in with us often to receive the most up-to-date guidance!
Health and Welfare Plans
What happens to employees’ active coverage under employer-sponsored welfare plans when their work schedules are reduced or they are furloughed or temporarily laid-off in response to the COVID-19 pandemic?
In most cases, the answer comes down to the terms of your plan documents, which include employer-prepared wrap welfare plan and summary plan description documents as well as the insurance policies for fully-insured welfare benefits. Things to consider are:
Often, welfare plan terms will extend active benefit coverage during certain periods of absences where the employee is working a reduced schedule or no hours. An employer-sponsored welfare plan may include medical, prescription drug, dental, vision, short-term and long-term disability, life insurance and other similar welfare benefits. Such plan terms are often written as “employer-approved leaves” whereby the employer, in its discretion, approves in writing to continue employees’ active benefit coverage during a period of reduced or no hours of service. In other words, plan terms may already provide an employer with the discretion to continue active coverage under the employer’s welfare plans.
Even when plan terms allow for extended active coverage during employer-approved leaves or other circumstances, employers should work with their insurance carriers for any fully-insured welfare benefits as well as stop-loss carriers for employers’ self-funded health plans to notify the insurer that active benefit coverage is continuing during periods of reduced or no hours of service. These communications with insurance carriers are imperative to avoid these carriers later denying fully-insured benefit claims of your employees or the employers’ stop-loss claims on account of employees no longer working the number of hours necessary to be considered benefit eligible.
A laid off employee, even when temporary, could be treated as a formal termination of employment for welfare plan purposes. Unless plan terms provide a special extension, active coverage for a terminated employee typically ends on date of termination or at the end of the month in which the termination occurs pursuant to plan terms. Your plan terms should clarify terminology among layoffs, furloughs, reduced hours, leaves of absences, etc., to clearly dictate when active coverage will continue or will end.
Even when plan terms are silent or provide for ending active benefit coverage due to reduced hours or layoff, employers retain discretion to amend their welfare plans to provide for new coverage rules. For example, employers could make a decision to continue much-needed benefit coverage to employees during this crisis, which will foster valuable human capital for employers. We are here to assist you with any plan amendments as well as working with your insurance brokers to obtain necessary approvals or riders to existing insurance policies.
For collectively bargained employees, welfare plan terms may be modified by the terms of the collective bargaining agreement. Be sure to review those bargaining agreements before announcing or taking action to end benefit coverage during a period of reduced hours or layoff.
Regardless of benefit-related decisions, the employer should have a clear line of communication with employees about benefit coverage during this time.
What are the legal limitations or implications in making benefit-related decisions in response to the COVID-19 pandemic?
There are a number of existing laws impacting benefit decisions, some of the key points are addressed below. However, statutory and regulatory guidance is rapidly evolving in response to COVID-19, so check back often with us for updates.
When an employee is absent from work for an FMLA leave of absence, employers are required to continue group health benefits on the same terms and conditions as if the individual were still actively working for the duration of the FMLA-leave. This FMLA period cannot be treated as or counted toward the maximum COBRA period. The employee, however, is required to pay his or her share of premium costs during this period (see below for more information on premium payments).
For non-FMLA leaves, if active coverage is ending under a group health plan (e.g., due to a termination of employment or a reduction of hours below the benefit-eligible threshold), COBRA coverage generally must be offered, unless your business qualifies for the small employer or church plan exemption (and even then, there may be state-COBRA-like laws that apply). Please contact us if you need help determining if your group health plans are subject to COBRA and employer COBRA notice obligations.
If you are an applicable large employer using the look-back measurement method (LBMM) to determine employees’ full-time status, there are a number of considerations. For example, an employee’s reduced hours do not change his or her status as a full-time employee during a stability period; meaning that the employee remains eligible for group medical coverage during the stability period if he or she is still employed but no longer working full-time. The LBMM rules also contain special rules for counting hours during the measurement period for employees with no hours or during special leave periods. We can walk you through these complex LBMM rules if you are using the LBMM.
Many states are enacting employment-related laws in response to the COVID-19 pandemic. To the extent these state employment laws mandate benefits under ERISA-covered plans, they will be preempted (i.e., not applicable to your ERISA-covered plan). Note that ERISA preemption does not apply to governmental and church plans, which are not subject to ERISA, or to state insurance laws regulating fully-insured group plans.
If active benefit coverage continues during reduced or no hours of service or temporary layoff situations, how should we handle employee share of the premiums during this time?
The answer, again, will mostly depend on your plan terms, but there are legal considerations at play too. Here are some considerations for employers:
For periods of absence during which the employee is being paid, regular pre-tax payroll deductions for benefits should continue in normal course. However, if employees have reduced pay during this time, you may need to consider alternative payment arrangements when there is not enough payroll to cover employees’ share of premiums.
Most plans, consistent with Internal Revenue Code Section 125 regulations, permit employees to pay their share of premiums for continued active coverage on a pay-as-you-go, pre-payment or catch-up basis during periods when employees are not receiving pay. Employer should review plan terms and decide if any amendments are necessary to accommodate payments during this period. For example, we have some employers that are adding the catch-up payment method to enable employees to repay their share of premiums when the return to full-time employment. Others are waiving premium shares during this period. Whatever you decide, you will need to set up a process for handling payments during this period and clearly communicate your decisions with employees.
If you require employees to remit premium payments during this period, and they fail to timely pay premiums, then coverage generally may be terminated retroactive to the date the payment was due. However, FMLA includes special rules for canceling health coverage for failure to pay during FMLA leave periods. Specifically, when an employee is on FMLA protected leave, absent any written policy that provides a longer grace period, the regulations require an employee receive a 30-day grace period to pay for benefit premiums before health coverage can be terminated. In addition, employers are required to provide the employee a written notice at least 15-days prior to the end of the grace period informing the employee that benefits will be terminated if payment isn’t received. A written notice should be sent via certified mail as well as in an electronic format (if the employee has communicated via email in the past). If premiums remain unpaid after 30 days and after the notice has been furnished, then coverage can be canceled retroactively. If the notice is not timely sent, coverage will cease 15 days after the required notice is given or the date specified in the notice, if later, unless the payment has been received by that date.
Whether employees can drop coverage or change to less expensive options during a reduced work schedule will depend on whether the employee experiences a change in status event under Internal Revenue Code Section 125. If an employee does not lose coverage as a result of reduced hours and the level and cost of the coverage remain the same, the employee technically has not experienced a change in status event. The IRS may issue some relief on this Internal Revenue Code 125 rules, so please contact us for these types of developments.
If an employee is covered under an HDHP-HSA option, will he or she lose eligible individual status when the HDHP pays for COVID-19 expenses before the employee has paid the minimum deductible expense?
No, employees will continue to be treated as eligible individuals for purposes of making or receiving contributions to their HSAs. On March 11, 2020, the IRS provided emergency relief to eligible individuals with HSAs in IRS Notice 2020-15. Specifically, an HDHP may cover the cost of testing for or treatment of COVID-19 before the employee has paid the deductible limit.
Are there any other changes to health plans that we should know about in light of the coronavirus pandemic?
Congress recently passed a new law, the Families First Coronavirus Response Act, that will, among other things, require most group health plans and individual health insurance plans to cover testing and associated visits related to COVID-19 with no cost sharing starting on and after March 18, 2020. Some states have adopted similar requirements for insurers they regulate, and many private insurance companies will voluntarily expand coverage for testing. Congress also is poised to enact additional legislation expanding the types of plans required to cover COVID-19 testing, waiving prior authorization requirements for COVID-19 testing and covering COVID-19 vaccines, once developed, at no cost to the patient. While private health plans likely cover most items and services needed to treat complications due to COVID-19, there is no clear federal requirement to do so at no cost-sharing to the covered individual.
Are there any considerations or actions that I should take in regard to my employee’s health and wellness prior to working?
Navigating proper procedures when an employee is noticeably sick or even asymptomatic (but thought to be sick) poses some unorthodox work encounters. Employers should understand what personal health data an employee might be obligated to disclose if he or she becomes infected or is at high risk for infection—which is likely to include anything that could interfere with the employee’s ability to perform the essential functions of the job, or that could increase the risk to coworkers or third parties through workplace contact.
Employer group health plans (including medical, dental, vision, EAP, health FSA and HRAs) are considered “covered entities” subject to HIPAA Privacy and Security Laws. Employers are subject to these privacy laws in handling employee information, including any positive diagnosis of COVID-19. Failure to understand the legal obligations in relation to such data could expose the company to breach of privacy claims. All such data must be handled within the organization’s data privacy protection framework and in accordance with the various laws.
How will the economic concerns related to the onset of COVID-19, including the volatile stock market and the potential reduction in employment and pay, affect my company’s retirement plan? As the plan sponsor, what do I need to know?
What is the government doing to help?
In connection with the Tax Cuts and Jobs Act of 2017, the Internal Revenue Service issued new Treasury Regulations affecting retirement plan hardship withdrawals. Many of the mandatory provisions were effective January 1, 2020, including: (A) prohibiting the suspension of elective deferrals after receipt of a hardship withdrawal; (B) removing the requirement that participants must first request available plan loans prior to requesting a hardship withdrawal; (C) increasing the potential available contribution sources to be withdrawn to alleviate a hardship situation; and (D) permitting withdrawals for participants affected by federally declared disasters. Importantly, many of these changes will enable participants to request hardship withdrawals during these challenging times. Please note that many of these changes were effective January 1, 2020, and retirement plans providing hardship withdrawals must be formally amended to reflect these new rules generally no later than December 31, 2021.
As the outbreak continues to unfold, employers should communicate with plan participants about their options under the terms of the plan document. Plan sponsors also could consider a plan amendment that provides participants more access to their retirement savings by allowing age 59.5 in-service distributions, potential hardship withdrawals and plan loans allowing for distributions to employees struggling financially.
Recognizing that many employees will be negatively affected by the COVID-19 pandemic, Congress currently is working on retirement plan reforms as part of the proposed Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Importantly, as the CARES Act is not final, this situation is extremely fluid but Dykema will publish a summary after the legislation is enacted. The initial proposed measures include (but will likely not be limited to the following):
Eliminating the 10 percent tax penalty for early withdrawal of retirement plan amounts (prior to the age of 59.5). Moreover, for the first time, participants would be able to recontribute such amounts back to the plan in future plan years.
Modifying the hardship withdrawal rules to provide tax-relief for participants directly affected by COVID-19, including spreading out the tax implications of such a withdrawal.
Increasing plan loan limits, while providing additional flexibility as to repayment terms.
For governmental retirement systems, many states are modifying their suspension of benefit rules to allow annuitants to continue receiving retirement allowance during periods of reemployment to ensure adequate staffing during a state of emergency.
In these difficult times, employers may be forced to reduce hours of service of certain employees or potentially layoff or terminate a portion of their workforce. How do these events affect the administration of their retirement plans?
Employees with reduced schedules, that have not yet satisfied a plan’s eligibility requirements, may have their entry date delayed until they return to work. As always, it is essential that your retirement plan be operated in accordance with its terms, including whether the plan credits hours of services in accordance with actual hours worked, an equivalency method or the elapsed time method. The methodology specified in the plan must be followed and it could significantly impact entry dates and the recognition of prior service upon the return to employment.
Similar to eligibility provision concerns, the plan’s terms will dictate how the plan should calculate and credit hours for vesting purposes.
Retirement plans often require participants to work a minimum number of hours of service during a plan year (e.g., 1,000) and/or be employed on the last day of the plan year for an allocation of employer contributions. Temporary layoffs and reductions in service may result in certain participants no longer being eligible to receive such amounts. These requirements can often be relaxed or tightened (to enlarge or decrease the number of eligible participants, respectively). Importantly, the Internal Revenue Code has numerous provisions regarding the timing of such modifications. Therefore, if you want to modify your plan’s allocation rules, please contact your Dykema lawyer to determine your available options.
Temporary layoffs with the intent to rehire in near future and hour reductions generally are not considered bonafide severances from employment, and, thus, participants would not be entitled to a distribution of their account balances solely on account of such layoff or reduced hours. Instead, the plan should be construed in accordance with its in-service, hardship and loan withdrawal provisions (or, amended to add such provisions).
Please remember that retirement plans must be administered and operated in accordance with their terms. Therefore, before you make any changes, it is vital to ensure that your plan permits such modifications (even if such contemplated improvements help the participants!).
As this may be a difficult economic year, can an employer modify its existing retirement plan contribution provisions?
While these requirements may be relaxed as part of the CARES Act, employers generally are prohibited from negatively affecting participants that may have already accrued a right to a contribution. For instance, if a defined contribution plan provides that all participants credited with at least 1,000 hours of service shall be entitled to a fixed profit sharing contribution or matching contribution, the plan may not be amended to retroactively reduce this contribution for participants that have already been credited with at least 1,000 hours of service. A plan sponsor, however, could prospectively amend the plan to decrease or altogether discontinue employer contributions on employees’ compensation earned after the date the plan amendment has been approved and adopted by the plan sponsor.
There also are restrictions on modifying safe-harbor matching or non-elective contributions mid-year.
If you are contemplating modifying or terminating your retirement plan, you should contact your Dykema attorney to explore your options.
Are there any special rules affecting our retirement plan if we need to terminate the employment of a significant portion of the workforce?
To protect participants, the Internal Revenue Code requires employers to fully vest the accounts of individuals affected by events that result in the termination of active participation of 20 percent or more of your active participant population. This can include significant corporate events, including those caused by adverse economic conditions and other triggers outside of an employer’s control. Importantly, this test is not necessarily based on any single event (day), but instead, multiple termination dates would be aggregated to determine if the 20 percent threshold is applicable. Moreover, affected plans may need to retroactively vest certain participants that had already terminated their employment.
Does the stock market’s volatility affect my fiduciary obligations?
As many know, an economic downturn will cause retirement plan investments to dip. It is imperative that fiduciaries follow the terms of their plan documents, including investment policy statements, and they should be vigilant in monitoring investment performance and communications with plan participants. Fiduciaries should work closely with their investment advisors and managers for guidance on long-term investment strategies, recommended rebalancing of investments and targeted communications with plan participants to address concerns over market volatility and short-term investment horizon for those closer to retirement.
Here to Help
Dykema is here to support our clients through this uncertain time. This alert does not intend to cover all benefits issues arising from COVID-19, but offers answers to some of the common questions we are receiving from our employer-clients. As mentioned above, please visit our COVID-19 Resource Center for more information. Please contact us with questions, especially as we anticipate rapid development of new statutory and regulatory guidance in response to the COVID-19 pandemic.
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