In addition to questions about how to handle employee illness and leave, employers must also grapple with how such circumstances impact employee benefits. We have put together some helpful guidance as you navigate these tricky waters. If you would like to discuss this new legislation, or have other questions, please do not hesitate to contact The Kullman Firm attorney(s) with whom you work.
Suspending matching contributions. Suspending or terminating 401(k) plan matching contributions may require a plan amendment, depending on how the plan is worded. If the plan relies on safe harbor matching contributions to avoid nondiscrimination testing, then either the employer must be operating at an economic loss (which the IRS has not defined) or the safe harbor notice that was given in 2019 for the 2020 plan year must have included certain language to alert employees of the suspension possibility. In addition, a prescribed notice must be given 30 days before the suspension is effective. The plan must be amended to provide for current year testing and employees must be given a reasonable opportunity to change their deferral elections before the suspension is effective.
In-Service Withdrawals. The IRS has not announced any special opportunity for 401(k) plan in-service withdrawals because of the pandemic. However, if the plan allows for hardship withdrawals, an employee might qualify based on the need to pay medical expenses for the employee or dependent. The income loss because of an unpaid layoff itself will not qualify as a hardship under most plan’s hardship definitions.
Group Health Plans
Layoffs. Many employers are choosing to temporarily layoff or furlough employees because of business slowdowns. Whether group health plan coverage continues or terminates because of a temporary layoff or furlough typically depends on the plan language and whether employees must pay more for their coverage during the layoff (see below.)
Continuing Coverage During Temporary Layoff. The plan might provide that coverage continues for a period during a temporary layoff or furlough. A plan without such a provision might be amended to provide for continued coverage during this time, however, the insurance company (for a fully insured plan) or reinsurer (for a self-funded plan) likely would have to approve any such amendment.
If an employee’s hours are reduced, a COBRA notice does not have to be given provided that the employee’s coverage remains in place and the employee is not required to pay more for coverage than before the reduction in hours. However, if the employee’s required contribution increases because of the reduction in hours, a COBRA notice must be given.
Coverage Termination Because of Layoff. A plan might provide that coverage terminates if the employee ceases to be regularly working a specified minimum number of work hours. In that case, the layoff would be a COBRA- qualifying event. On the other hand, if eligibility is based on the Affordable Care Act’s lookback measurement rules, the employee’s full-time eligibility status might be based on a prior measurement period. In that case, the reduction in hours because of the layoff might not cause the employee to lose eligibility during the associated stability period during which the employee’s status as full-time or not full-time is established.
Medical Plan First Dollar Coverage of Diagnostic Tests. The Families First Coronavirus Response Act (FFCRA) requires both insured and self-funded group health plans to provide coverage without cost sharing (such as deductibles, copayments, or coinsurance) for virus-related in vitro diagnostic tests and certain related items and services. Unlike paid leave required under the FFCRA. there is no provision to reimburse self-funded plans or insurance companies for these increased costs.
Privacy Issues. If the employer learns of an employee’s diagnosis through the group health plan (such as because of a claim) or because the employer is a health care provider (such as a hospital), the diagnosis is protected health information (PHI) and is subject to HIPAA’s protections and exceptions.
Dependent Care Flexible Spending Accounts. An employee may cease to pay a dependent care provider, such as if the day care center is closed because of COVID-19 or if the employee is working from home and doesn’t need dependent care. Such changes generally will be considered a change in coverage that will allow the employee to reduce or revoke his dependent care flexible spending account election.
Vacation Paid Time Off
Cash-In. The IRS has not announced special rules allowing employees an election to cash in unused vacation or paid time off (PTO) balances. If employees are given a current year election to cash in PTO or carry it over to the next year, the IRS takes the position that employees who choose not to cash in PTO are taxed on the amount they had the right to cash. The employee has taxable income because the IRS considers the employee who chooses not to cash in the hours to have been in “constructive receipt” of the income he chose not to take.
This problem can be avoided if the cash-in is automatic and the employee has no election to carry over the hours. For example, there would be no constructive receipt issue if a specified number of PTO hours are automatically cashed in for employees whose hours are reduced or for employees who are laid off.
Since legal developments pertaining to COVID-19 are constantly evolving, we recommend that our clients call the Kullman Firm attorney(s) with whom they work for the most current guidance on these matters.