FAQs: COVID-19 – Employee Benefits Updates

Alerts / June 25, 2020
Q: Is our health plan required to provide free coverage of services related to COVID-19 diagnosis and treatment? (Updated June 25, 20202)

A: Yes, as it relates to diagnostic testing. Pursuant to Section 6001 of the Families First Coronavirus Response Act (FFCRA), all group health plans (including self-insured group health plans) and health insurance issuers offering group or individual health insurance coverage, including grandfathered health plans, must provide in-network and out-of-network coverage for COVID-19 diagnostic testing, including related physician/facility costs, with no cost-sharing, prior authorization or other medical management requirements. This coverage requirement would apply during an “Emergency Period,” as defined under Section 1135(g)(1)(B) of the Social Security Act (“the period during which there exists … a public health emergency declared by the Secretary pursuant to section 319 of the Public Health Service Act”). The FFCRA sunsets on Dec. 31, 2020.

The Departments of Treasury, Labor and Health & Human Services have issued additional guidance to assist group health plans in determining what COVID-19 tests must be covered without cost-sharing, prior authorization or medical management requirements. This guidance can be accessed here. There is no limit on the number of tests a group health plan must cover for a given individual, but a COVID-19 test need be covered only if it is diagnostic and medically appropriate for the individual, as determined by an attending healthcare provider in accordance with current accepted standards of medical practice.

Note that the FFCRA does not impose similar coverage requirements for COVID-19 treatment. These requirements are expanded via the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a full summary of which is provided in our separate CARES Act Alert.

Q. Do group health plans have to cover COVID-19 tests administered at home? (June 25, 2020)

A: Yes. The Departments of Treasury, Labor and Health & Human Services issued guidance on June 23, 2020, stating that even if an individual performs self-collection of a specimen at home, so long as the COVID-19 test is ordered by an attending healthcare provider who has determined that the test is medically appropriate for the individual based on current accepted standards of medical practice, and so long as the test meets the statutory requirements of Section 6001(a)(1) of the FFCRA (see additional information regarding these requirements here), the at-home test must be covered without cost-sharing, prior authorization or medical management requirements.

Q: Do group health plans have to cover “return-to-work” screenings? (June 25, 2020)

A: No. Group health plans must cover only COVID-19 testing related to individualized diagnosis and treatment. Group health plans need not cover generalized workplace health and safety testing for COVID-19.

Q: Do the FFCRA, CARES Act and related guidance foreclose the possibility of balance billing for COVID-19 testing? (June 25, 2020)

A: The Departments of Treasury, Labor and Health & Human Services have interpreted the FFCRA and CARES Act as eliminating the need for any balance billing related to COVID-19 testing because a provider of COVID-19 testing will be reimbursed either a negotiated rate or an amount equal to the cash price for the test that the provider has posted on a public website. The departments warn, however, that balance billing may occur for out-of-network services incurred for COVID-19 treatments and other services that do not fall under the statutory requirements for the coverage of COVID-19 testing. Any such balance billing could be subject to state law dispute resolution processes.

Q: If a group health plan participant obtains a COVID-19 test at an out-of-network emergency room, will the charges for that test be adjudicated under the Affordable Care Act’s emergency room coverage requirements or under the coverage requirements of the FFCRA and the CARES Act? (June 25, 2020)

A: According to the Departments of Treasury, Labor and Health & Human Services, in guidance issued June 23, 2020, a plan must reimburse an out-of-network provider of COVID-19 testing an amount that equals the cash price for such service that is listed by the provider on a public website, or the plan or issuer may negotiate a rate that is lower than the cash price. This will foreclose the potential for balance billing on COVID-19 testing charges. Note, however, that the Affordable Care Act’s emergency room coverage requirements still apply to other out-of-network emergency services that fall outside the statutory requirements for coverage of COVID-19 testing, and incurring such services may result in balance billing.

Q: If a group health plan that had increased benefits or reduced or eliminated cost-sharing for the diagnosis and treatment of COVID-19 or for telehealth and other remote care services in response to the COVID-19 pandemic chooses to reverse such benefits once the COVID-19 public health emergency no longer is in effect, how much notice must the plan give participants of the reversal? (June 25, 2020)

A: Plans that, at the time of the increase in benefits or reduction in cost-sharing for the diagnosis and treatment of COVID-19 or for telehealth and other remote care services, provided notice of the expected duration of the increased benefits are deemed to have provided sufficient notice of when such benefits would end. Plans that did not provide notice of the duration of the increased benefits at the outset must give participants “reasonable” notice before reversing such increases. For these two types of plans, the Departments of Treasury, Labor and Health & Human Services will not be strictly enforcing the 60 days’ prior notice requirements related to changes to the content of summaries of benefits and coverage.

Q: Have regulators provided any sort of relief for large employers that wish to offer some type of coverage for employees who are not eligible for their major medical plan? (June 25, 2020)

A: Yes. In guidance issued by the Departments of Treasury, Labor and Health & Human Services on June 23, 2020, the departments state that an employer may make telehealth and remote care services available to employees who are not otherwise eligible for the employer’s major medical plan and that such an arrangement will be free of many of the group health plan requirements under the Internal Revenue Code, ERISA and the Public Health Service Act. However, this type of arrangement still would be subject to nondiscrimination, anti-rescission and mental health parity provisions. Any employer wishing to provide this kind of arrangement to employees is strongly urged to consult with legal counsel before doing so for a better understanding of which group health plan requirements are relieved and which ones must be designed into the arrangement.

Q: My company sponsors a wellness program, but our participants are having a hard time meeting the wellness program standards as a result of the circumstances surrounding COVID-19. Can my company still pay out wellness program rewards to participants who have not met the reward standards? (June 25, 2020)

A: Yes. So long as a waiver of the reward standard is offered to all similarly situated individuals, a group health plan may waive a wellness program standard, including a reasonable alternative standard.

Q: Has the IRS issued any additional employee benefit plan-related deadline relief? (Updated June 5, 2020)

A: Yes. In addition to the benefit plan-related relief issued under IRS Notice 2020-18 (see our FAQ updated on June 2, below), the extended deadlines for updating 403(b) and preapproved defined benefit plan documents and changes to related remedial amendment periods (see our FAQs, below), and the extended deadlines for filing the Form 5498 series (relating to IRAs, education savings accounts [ESAs], health savings accounts [HSAs], Archer medical spending accounts [MSAs] and Medicare Advantage MSAs) (see our FAQ below), the IRS has issued relief for certain employee benefit plan-related filing, correction and contribution deadlines.

Under IRS Notice 2020-23, an individual with a federal tax payment obligation or federal tax return or other form filing obligation specified in the notice that is due to be performed on or after April 1, 2020, and before July 15, 2020, is considered an “Affected Taxpayer” and may postpone such obligation until July 15, 2020.

More generally, Notice 2020-23 states that any person performing a “Time-Sensitive Action” listed in Rev. Proc. 2018-58 is considered an Affected Taxpayer for this purpose. This reference has the effect of extending to July 15, 2020, a host of employee benefit plan deadlines that would otherwise fall within the noted time range, including (but not limited to) the following:

  • Form 5500 filing deadlines (but note that this does not provide any relief with respect to calendar year plans due to the general filing deadline for such plans).
  • Qualified plan loan repayment deadlines.
  • Deadlines for making rollover contributions.
  • Cafeteria plan election and forfeiture deadlines.
  • Deadlines for distributing excess deferrals.
  • Correction periods for self-correction of operational failures.

Notice 2020-23 notes that this relief is automatic. Affected Taxpayers need not call the IRS nor file any extension forms or send letters or other documents to receive this relief. If Affected Taxpayers require additional time to file, they should file the appropriate extension form by July 15, 2020, to obtain an extension to file their return; such an extension date may not go beyond the original statutory or regulatory extension date. No interest, penalties or additions to tax will accrue with respect to eligible postponed filings and payment obligations; however, interest, penalties or additions to tax will begin to accrue on July 16, 2020, if the filing and payment obligations are not met or appropriately extended by July 15.

Subsequently, in IRS Notice 2020-35, the IRS issued further relief for additional employee benefit plan-related deadlines. As under Notice 2020-23, the relief generally extends these deadlines to July 15, 2020:

  • The deadline for implementation of corrective actions and adoption of corrective amendments required by a compliance statement issued pursuant to the Voluntary Correction Program of the Employee Plans Correction Resolution System (EPCRS).
  • For single-employer defined benefit pension plans, the deadlines for:
    • filing applications for funding waivers, and
    • requesting approval of a substitute mortality table.
  • For multiemployer defined benefit pension plans, the deadlines for:
    • the certification of funded status and related notice to interested parties,
    • the adoption of a funding improvement or rehabilitation plan and related notice to bargaining parties, and
    • the annual update of a funding improvement or rehabilitation plan and its contributions schedules and related filing with the annual return.

Notice 2020-35 also provides for a moratorium on the accrual of interest and penalties for failure to file a Form 5330 (relating to various excise taxes) or to pay the related tax from March 30, 2020, through July 15, 2020.

Q: Has the IRS provided any extensions to looming 2020 deadlines for retirement plan sponsors to update 403(b) plans and preapproved defined benefit plan documents? (Updated June 5, 2020)

A: Yes. The IRS has extended to June 30 the March 31 deadline for a retirement plan sponsor to adopt an updated preapproved or individually designed 403(b) plan document.

The IRS has also extended to July 31 the April 30 deadline for a retirement plan sponsor to adopt an updated preapproved defined benefit plan document. The extended deadline applies to amendments that fix any disqualifying provisions that existed during the six-year amendment period that was to end on April 30. The related deadline for submitting to the IRS a determination letter application for such an updated preapproved defined benefit plan document is also extended to July 31. The extensions of the end of the current six-year period will result in the delay of the start of the next six-year remedial amendment period for preapproved defined benefit plan documents, which will now start on Aug. 1, 2020, but will still end as scheduled on Jan. 31, 2025. The IRS will be issuing further guidance about the next six-year period for plan sponsors as well as guidance for preapproved plan document providers.

More information about these extensions was published on the IRS website on March 27 and is available here.

Q: Has the IRS provided any extension to the 2020 deadline to file and furnish IRS Form 5498 (IRA Contribution Information), Form 5498-ESA, (Coverdell ESA Contribution Information) and Form 5498-SA (HSA, Archer MSA or Medicare Advantage MSA Information)? (June 5, 2020)

A: Yes. In Notice 2020-35 (discussed further in deadline extension FAQ above), the IRS announced that it has extended the due date for filing and furnishing these forms to Aug. 31, 2020. In addition, the period from the original due date through Aug. 31 will be disregarded in the calculation of any penalty for failure to file them.

Q: In the midst of the COVID-19 pandemic, some of my employees have asked whether they can change their health plan, health flexible spending account or dependent care flexible spending account elections made under our Code Section 125 “cafeteria” plan for 2020. Are such election changes permitted? (May 15, 2020)

A: Yes, certain cafeteria plan election changes related to health plan, general and limited purpose health flexible spending account (health FSA) and dependent care flexible spending account (dependent care FSA) elections now are permitted as a result of the COVID-19 pandemic. Recognizing the fact that the COVID-19 pandemic likely has impacted individuals’ health plan selections and forecasted health and dependent care expenses, the Internal Revenue Service (IRS) recently issued Notice 2020-29 to provide relief to individuals seeking to change their elections. This relief is available even if facts that typically would be required by the cafeteria plan election change rules are not present.

Notice 2020-29 generally provides the following relief related to health plan election changes made during calendar year 2020.

A § 125 cafeteria plan may permit employees who are eligible to make salary reduction contributions under the plan to:

  • make a new election on a prospective basis if the employee initially declined to elect employer-sponsored health coverage;
  • revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (e.g., changing from single to family coverage); and
  • revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled or immediately will enroll in other health coverage not sponsored by the employer.

The Notice has sample attestation language for employers to use when requiring employees to attest that they are enrolled in or immediately will enroll in other coverage. Employers are entitled to rely on the attestation, unless the employer has actual knowledge that the employee is not, or will not be, enrolled in other coverage.

With regard to health and dependent care FSA election changes made during calendar year 2020, Notice 2020-29 provides that a § 125 cafeteria plan may permit employees who are eligible to make salary reduction contributions under the plan to revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA (general or limited purpose) or dependent care FSA, as applicable, on a prospective basis.

In addition, for unused amounts remaining in a health FSA or a dependent care FSA under the § 125 cafeteria plan as of the end of a grace period or plan year ending in 2020, a § 125 cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through Dec. 31, 2020.

Importantly, none of the relief described above is mandatory. A plan sponsor may choose whether or not to permit any or all of the election changes and the extension to exhaust unused health and dependent care FSA amounts. An employer can also tailor these changes by, for example, limiting the number of times that an employee can make an election change under the new health plan and health/dependent care FSA election change rules. The Notice also suggests that employers may want to adopt election change relief only in ways that would curb adverse selection (e.g., only permitting health plan election changes that increase or improve coverage – moving from self-only to family coverage or from a lower-value option to a higher-value option). In addition, an employer may limit health and dependent care FSA elections to amounts no less than what has already been reimbursed. While employers have some discretion in how they may tailor these rules, a plan sponsor may not adopt relief in a way that would violate Code Section 125’s nondiscrimination requirements.

Plan sponsors that adopt any of these new rules must amend their plans to reflect the temporary relief, which is only available during 2020. The amendment must be adopted by Dec. 31, 2021, and may be retroactive to Jan. 1, 2020.

Q: Do group health plan sponsors need to amend their plans to reflect changes made pursuant to the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)? (April 22, 2020)

A: Yes, plan changes made pursuant to the FFCRA and CARES Act should be reflected in updated plan documentation and plan participant disclosures. However, the Departments of Treasury, Labor, and Health and Human Services (the Departments) issued FAQs on April 11, 2020, providing plan sponsors with timing relief for updates of plan documentation and disclosure materials for plan modifications related to adding benefits for or reducing or eliminating cost-sharing applicable to the diagnosis and/or treatment of COVID-19 and telehealth services. For example, plan modifications that would alter the content of a Summary of Benefits and Coverage (SBC) typically must be disclosed 60 days prior to any such modification becoming effective. One of the Departments’ FAQs, however, states “to help facilitate the nation’s response to COVID-19, the Departments will not take enforcement action against any plan or issuer that makes such modification to provide greater coverage related to the diagnosis and/or treatment of COVID-19, without providing at least 60 days’ advance notice. Plans and issuers must provide notice of the changes as soon as reasonably practicable.” As of now, the nonenforcement policy will be in effect for the duration of the COVID-19 national emergency.

Q: May an employee take a hardship withdrawal from his or her 401(k) plan due to financial needs created by the COVID-19 pandemic? (Updated April 22, 2020)

A: Those impacted by COVID-19 may be able to take a coronavirus-related distribution from plans that have adopted this new option made available under the CARES Act. More information on those distributions is available in our separate CARES Act Alert.

If the employee’s 401(k) plan does not permit coronavirus-related distributions, the employee may still be able to take a hardship withdrawal as a result of COVID-19, depending on the circumstances. First, you need to confirm whether the plan permits hardship withdrawals at all. Second, if the plan does permit hardship withdrawals, you need to determine whether the employee’s situation satisfies the conditions for such a distribution. There are two main conditions that must be satisfied for an employee to take a hardship withdrawal:

  • The participant (or, in some cases, the participant’s spouse, child, dependent or primary beneficiary) must have an “immediate and heavy financial need.”
  • The distribution must be necessary to meet that financial need, which generally means that the participant does not have other resources to meet that need (e.g., other available distributions under the plan).

Most plans use “safe harbor” rules to determine if there is an immediate and heavy financial need. The following two safe harbor financial needs may allow an employee to take a hardship withdrawal due to COVID-19:

  • Expenses for medical care previously incurred by the participant, the participant’s spouse, any of the participant’s dependents or the participant’s primary beneficiary under the plan; or expenses necessary for those persons to obtain medical care (but limited to expenses for medical care that are deductible under Internal Revenue Code § 213).
  • Payments necessary to prevent the eviction of the participant from the participant’s principal residence or foreclosure on the mortgage on that residence.

It is clear that COVID-19 could trigger expenses related to medical care, in which case plans that include that safe harbor could likely provide a hardship withdrawal to pay for those expenses. While hardship withdrawals to prevent foreclosure or eviction may be appropriate, on March 18, U.S. Department of Housing and Urban Development Secretary Ben Carson authorized the Federal Housing Administration (FHA) to implement an immediate foreclosure and eviction moratorium for single-family homeowners with FHA-insured mortgages for the next 60 days. While not all evictions and foreclosures fall under this umbrella, states may follow suit with their own moratoriums. Accordingly, hardship withdrawals on account of potential evictions or foreclosures resulting from COVID-19 impacts may be rare.

Additionally, many plans have been amended to include a newer safe harbor hardship reason that allows distributions for expenses and losses caused by a federally declared disaster, provided that the employee’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster. All 50 states, the District of Columbia and four territories have been approved for major disaster declarations with respect to the COVID-19 pandemic. However, it is not clear whether all states have been designated by FEMA for individual assistance, as some declarations clearly reference the availability of individual assistance (e.g., crisis counseling) while others do not. Accordingly, we suggest that plan sponsors seek advice of counsel before making hardship withdrawals based on this new safe harbor rule.

For plans that do not utilize the safe harbor hardship withdrawal rules, a facts-and-circumstances determination would apply in order to determine whether the employee has an immediate and heavy financial need that cannot be satisfied through other resources. Plan terms should always be reviewed to ensure that the distribution is appropriate. The plan sponsor should carefully define the types of losses or expenses, determine whether such relief is limited to the participant’s spouse and dependents or is available to relieve the needs of extended family members, and define the plan accounts from which funds may be withdrawn.

Finally, it is also important to remember that hardship distributions are subject to the same tax rules as other plan distributions and cannot be repaid to the plan like a loan. They may also be subject to a 10% early distribution penalty, unless the participant has reached age 59½ or the hardship distribution is for the purpose of satisfying certain medical expenses.

Q: For all Federal income tax returns and payments due on April 15, 2020, IRS Notice 2020-18 generally postpones the due date until July 15, 2020. Does this have any impact from an employee benefits perspective? (Updated April 22, 2020)

A: Yes, the IRS issued on March 24 FAQs to help clarify some of these issues. While the FAQs address a broad spectrum of income tax filing/payment issues, the employee benefits guidance is limited to the following:

  • Broadly speaking, tax filing/payment relief applies to anyone who has a federal income tax return or payment due on April 15, 2020.
  • The relief extends the deadline for making 2019 Individual Retirement Account (IRA) contributions from April 15, 2020, to July 15, 2020.
  • The relief extends the deadline for paying the additional 10% tax owed with respect to early distributions (prior to age 59½) from IRAs and retirement plans from April 15, 2020, to July 15, 2020.
  • For employers with a tax filing deadline of April 15, 2020, the relief extends the deadline for making 2019 retirement plan contributions to July 15, 2020.
  • The relief extends the deadline for making 2019 health savings account (HSA) and Archer medical spending account contributions from April 15, 2020, to July 15, 2020.

The FAQs also clarify that an employee who made excess deferrals to a retirement plan in 2019 is still required to take those excess deferrals (and income) out of the plan by April 15, 2020, in order to exclude the distributions from income. However, it appears that the IRS reversed course on that via Notice 2020-23, which is described in more detail in our more detailed FAQ on that release.

Q: How does the proposed CARES Act affect employee benefit programs? (Updated March 26, 2020)

A: The CARES Act has far-reaching impacts on qualified retirement plans and health and welfare plans. A complete summary of all employee benefit plan provisions in the CARES Act is available in our separate Alert, titled CARES Act to Provide Significant Employee Benefit Plan Relief for Participants and Plan Sponsors.

Q: Can my high-deductible health plan offer free telemedicine services (before the deductible is met) and still remain health savings account (HSA) eligible? (Updated March 26, 2020)

Yes, as explained in our CARES Act Alert, the CARES Act includes a provision ensuring that those who receive free telemedicine services are still eligible to contribute to an HSA.

Q: Due to a reduction in hours scheduled to be worked, our company believes that many of our employees will have insufficient compensation to cover the cost of their benefits elections. Do we have the option of continuing their benefits and collecting their past-due premium payments when their work schedule returns to normal, and of charging “catch-up” premiums? (March 25, 2020)

A: It is likely that this sort of arrangement is permissible, but the employer should set up, clearly communicate about and consider whether it is required to obtain the employee’s consent to a new payment schedule. It may be the case that the company’s benefit plan already contemplates catch-up payments for benefits continued during an unpaid leave of absence, but this probably is not the common case, other than for leaves under the Family and Medical Leave Act (FMLA). An employer contemplating benefit plan catch-up payments should consult with appropriate counsel to ensure that both Internal Revenue Code and state wage laws are considered before a new payment schedule is implemented.

Q: Our company is facing serious cash flow issues as a result of the COVID-19 outbreak and related governmental restrictions on our business. Can our company defer or reduce employee benefit plan benefits, including 401(k) match benefits, during this time? (March 25, 2020)

A: Maybe. The plan administrator of an ERISA employee benefit plan must comply at all times with the terms of the plan document. Accordingly, one initial consideration is whether the particular change is permitted under the plan. If not, it may be possible to amend the plan to reduce or eliminate future benefits, but there are a host of legal considerations to keep in mind. First, the Internal Revenue Code Section 411(d)(6) anti-cutback rules generally prohibit any reduction or elimination of accrued retirement plan benefits.

Second, while some employers have contemplated delaying the contribution of elective deferrals to 401(k) plans in response to the financial crisis, we would heavily discourage this approach. The Department of Labor generally expects that employee contributions be made to plans as soon as reasonably practical (typically in a matter of days), and any delay in normal procedures is generally viewed as a fiduciary breach and a prohibited transaction, requiring corrections, reporting and payment of excise taxes.

Third, if reducing or eliminating an employer matching contribution midyear, special considerations may apply:

  • If the match is a safe harbor match, the match can be reduced or eliminated midyear only if (1) the plan sponsor is operating at a loss or (2) the annual safe harbor notice distributed to participants included certain language reserving the right to make such changes. Employers also must notify each employee of the change at least 30 days prior to its effective date and give employees a reasonable period of time to change their cash or deferral election after receipt and before the effective date of the change. A 30-day election period is deemed reasonable.
  • If the match is not a safe harbor match, a midyear change is generally permitted, provided the change is prospective. An amendment would be needed, and clear communication of the change is important.
  • If the match is discretionary, an amendment may or may not be needed. Again, clear communication is advisable.

Historically, similar rules also applied to determine whether a midyear elimination or reduction of safe harbor nonelective contributions is permitted. The SECURE Act changed the rules for plan years beginning after 2019. Given the lack of complete guidance on the application of those changes, plan sponsors that are considering a midyear elimination or reduction of safe harbor nonelective contributions should work closely with counsel to determine whether such changes are permitted.

Reducing or eliminating benefits can be controversial and raises legal issues beyond those noted here. For those reasons, any company considering amending its benefit plan to change benefits on a prospective basis should discuss such proposed change with appropriate counsel before taking action.

Q: We have decided to institute employee furloughs; employees will remain employees but will be asked to not provide services for a period of time. Are there any health plan and Affordable Care Act (ACA) issues we need to consider? (March 23, 2020)

A: Where a company has determined that it needs to furlough employees, the company will need to determine whether and how it will handle the continuation of healthcare for those employees. If the furlough will result in employees experiencing a reduction in hours triggering a loss of healthcare plan eligibility, a Consolidated Omnibus Budget Reconciliation Act (COBRA)-qualifying event will have occurred (so long as the company is subject to COBRA). The company will need to offer COBRA coverage to the qualifying beneficiaries; however, such coverage may be unaffordable for certain (or all) employees and expose the company to ACA employer mandate penalties for failure to provide affordable coverage (if the company is large enough to be subject to the ACA employer mandate). If this is the case, the company could decide to accept such exposure and play the odds of how many employees will qualify for subsidized exchange coverage as a result of the furlough. Or the company could decide to subsidize the COBRA coverage so that it will not be unaffordable. Any company considering the furlough of employees should carefully consider the health plan, the ACA and other employee benefits implications of such an action.

Q: We have decided we need to terminate/lay off employees due to our company’s deteriorating financial situation, but we hope we can rehire them. What employee benefits issues do we need to consider? (March 23)

A: Where a company has already decided to terminate a large number of employees, we advise ensuring that what the company is doing is consistent with the terms of its employee benefits plan documents, including insurance policies. For example, the healthcare plan terms should define when coverage terminates, and a COBRA-qualifying event occurs (such as the end of the month in which termination occurs). Past practices are not necessarily consistent with plan documents, so we caution companies not to rely on that alone without reviewing the appropriate documents. If the employer wants to be more generous than the plan terms, it needs to consider whether the plan terms need to be amended and whether insurer consent is required. This is the case whether the healthcare plan is fully insured or is self-insured with stop-loss coverage. If a decision is made to be more generous than the plan terms and insurer consent is not obtained, there is a risk that an individual could incur substantial healthcare costs (e.g., requiring the use of a ventilator in a COVID-19-related case), and the insurer would take the position that the individual was not covered, leaving the employer potentially self-insuring the cost of care.

If severance will be paid in the form of a simple lump sum, that can typically be done without adopting an ERISA severance plan. If the severance is more complicated, including severance payments over time and COBRA subsidies, there are other potential issues to consider, such as whether any self-insured healthcare benefits discriminate in favor of highly compensated individuals, whether the company has created a severance plan subject to ERISA and whether there are any Internal Revenue Code Section 409A deferred compensation issues.

The company also needs to consider its strategy for compliance with the Affordable Care Act (ACA) and its healthcare plan’s terms. What provisions will apply when/if the employee is rehired? Is this consistent with the company’s intent, or might plan amendments be required? The ACA generally requires certain rehired employees to be treated as continuing employees if their break in service is short enough, so the company should be mindful of these rules if and when it begins the rehiring process.

The company also needs to consider its 401(k) plan. If a significant number of employees are terminated, the 401(k) plan may be deemed to have a partial termination, which requires vesting of affected participants. The determination of whether a “significant number” of employees have been terminated has numerical guidelines, but also is a facts and circumstances test, so counsel should be engaged to help the company understand the implications of terminating a group of employees. Also, the employer needs to anticipate that terminated employees will request distributions based on their termination from employment. If the employer is intending to rehire these employees very quickly, proceeds with distributions and then does quickly rehire the employees, these may be deemed sham terminations for which distributions should not have been allowed.

Q: We have significant concerns about company cash flow and viability. What employee benefits issues do we need to consider? (March 23, 2020)

A: Where a company has significant cash flow and viability concerns, we encourage consideration of employee benefits issues that could result in personal liability of certain officers/employees. Essentially, if employee benefits are not paid, the former employees and the U.S. Department of Labor will look for officers/employees (ERISA fiduciaries) to blame. Therefore, we strongly encourage employers to think about these issues as early as possible.

Any amounts withheld from pay for contribution to a 401(k) plan, including loan repayments, as well as employer contributions, need to be timely contributed to the trust. Any amounts withheld from pay for insurance contributions (and the employer share of contributions) need to be timely paid to the insurance company. If the company thinks it cannot keep up with payment of employee and employer premium contributions, it may need to consider freezing the plans. This is especially the case if the company does not have control of its bank accounts, e.g., if a creditor is sweeping the accounts and will not agree to honor these commitments.

Also, we are seeing more companies that are self-insured as to healthcare, including smaller companies that have what is called “level funded” coverage. With a self-insured plan, if the company suddenly shuts down, there is typically no one (and no cash) to pay healthcare expenses that were incurred but not paid prior to the shutdown, stop-loss coverage ends and COBRA is not even available. This could be catastrophic to employees, especially if employees are being terminated during a pandemic. Employees could have huge unpaid healthcare expenses for coverage they were told was in place and be forced to immediately find and pay for other healthcare coverage. Again, if things are starting to look bad, an employer needs to immediately consider its healthcare plan and what it can do to ensure that there will not be unpaid healthcare bills, including negotiating with the parties providing services and with creditors.

Q: Does the FFCRA include any other employee benefits-related provisions? (March 20, 2020)

A: The FFCRA includes additional emergency paid sick leave and Family and Medical Leave Act provisions that affect employers with fewer than 500 employees.

Q: Does HIPAA prevent me from sharing employee information regarding COVID-19? (March 20, 2020)

A: HIPAA usually is not implicated in these situations because the employer is not a covered entity subject to HIPAA. It would likely violate HIPAA if an employer obtained health information regarding COVID-19 from the health plan (which is a HIPAA-covered entity). However, it is more likely that such information would come directly from the employee, and if it did, that would not violate HIPAA. It is important to remember, however, that state data protection laws and other laws do protect medical information, so it is still advisable to protect such information.

Q: Are employees who are not injured or ill eligible for short-term disability benefits if they are quarantined for COVID-19-related reasons but have not been diagnosed with COVID-19? (March 18, 2020)

A: Quarantine when the employee is otherwise healthy typically would not trigger short-term disability benefits. An injury or onset of illness is usually necessary to trigger most short-term disability plan benefits. The specific terms of the applicable short-term disability plan should be reviewed to determine whether a given instance of absence from work would qualify for short-term disability benefits. Please note that the employee may be eligible for other paid or nonpaid leave under applicable laws (including pursuant to the FFCRA).

Q: Should COBRA be offered to employees who are sent home or cannot work for COVID-19-related reasons? (March 18, 2020)

A: Generally, COBRA applies only if there is a triggering event (e.g., termination of employment or reduction in hours) that results in a loss of group health plan coverage. Each employer will have to look at this based on its current plan provisions and leave policies to determine whether this type of situation triggers a COBRA qualifying event. In the current environment, employers may want to exercise some flexibility, but they should clearly document changes from their normal procedures and notify third parties that may be affected by these changes, such as insurance carriers.

Authorship Credit: Jennifer A. Mills, Susan Whittaker Hughes and Seth J. Hanft

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