Benefits and Compensation, Coronavirus (COVID-19)

Crisis Strains Employers’ Plans for Furloughed Workers

Many struggling but optimistic employers have continued to offer medical, dental, and other benefits to employees on furlough during the COVID-19 pandemic. But with no immediate end in sight, they’re wondering what to do next.

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Employment Relationship Hasn’t Been Severed Yet

Most businesses in the United States (and the world, for that matter) remain hobbled because of the coronavirus crisis. (Amazon is an exception. Another notable exception is Peloton, the exercise bike maker, which is glowing in its 172% surge in total revenue, with gains in subscribers and demand for its fitness products.) But employees in several industries, including travel, hospitality, and entertainment, remain uncertain about their futures.

Before the pandemic, “furlough” was a concept more familiar in European countries where it’s mandated by law. We’ve now settled on the concept that the employer hasn’t severed the employment relationship of a furloughed employee, who is still active in the HR system. Instead, the individual isn’t actively working or being paid except for the value of the benefits the employer continues to provide.

Employer Options

Check your benefit plans and insurance policies. Determine how long you may extend eligibility even though furloughed employees aren’t actively working. Many employers have clauses limiting the coverage to 6 months. Other plans or policies don’t specifically address the duration, but carriers have allowed the coverage to remain in place so long as the employer pays the necessary premium. (Please get this in writing from your insurance carrier.)

As your benefits department begins delving into 2021 open enrollment, don’t forget about the last quarter of 2020 and its special circumstances for any furloughed group.

Revisit your benefits plan’s COBRA provisions. Normally, the reduction in the number of hours worked would constitute a COBRA-qualifying event but not if the event doesn’t also result in the loss of eligibility for coverage.

For furloughed employees who still have health coverage, their COBRA event presumably won’t occur until actual termination of employment, at which point presumably they will remain eligible for COBRA coverage for at least 18 more months, depending on plan terms, albeit without the employer subsidy.

With appropriate plan provisions, an employer with furloughed employees may now take action before termination to trigger COBRA earlier and thereby have at least some portion of the furlough period with the company’s subsidy counting toward the 18 months of required COBRA coverage.

Rehiring Employees Before Year’s End

Some employers may have terminated employees but still hope to rehire them before the end of 2020. The laid-off workers likely withdrew their vested 401(k) plan account balances.

The IRS has provided helpful guidance on the “partial termination” issue affecting 401(k) plans and other tax-qualified retirement plans. Identifying the occurrence of a “partial termination,” which generally occurs with an employer-initiated plan participant reduction of 20% or more, is important because affected individuals will become 100% vested in the employee contributions on their behalf. As a result, the laid-off employees might be entitled to a greater vesting percentage of their account balances.

Significantly, the IRS announced employees who were laid off (not just furloughed) during 2020 won’t count to determine if the 20% threshold was reached if they’re rehired before the end of the year. Furloughed employees, who haven’t actually severed their employment, presumably won’t factor into the partial termination calculations.

Sharon Quinn Dixon is an attorney in both the tax and the labor and employment law practices at Stearns Weaver Miller Weissler Alhadeff and Sitterson, P.A., in Miami, Florida. You can reach her at sdixon@stearnsweaver.com.