Handling Benefits during protected and non-protected leave periods can be tricky!
Do you have a detailed explanation of how health benefits are handled during protected leave and non-protected leave periods?
Compliance Team Answer:
Here’s an overview of the leave issues.
- Protected Leave (FMLA/CFRA/PDL)
Maintaining Group Health Plan Coverage
Employers must maintain group health plan coverage for an employee FMLA, CFRA, or PDL leave in the same manner as if the employee were active. This means the employee cannot be required to pay more than the active employee-share of the premium.
Paying for Group Health Plan Coverage
The Section 125 rules provide three ways to handle collection of the employee’s payment:
- Pre-pay: Under the pre-pay option, the employee is given the opportunity to pay for the continued coverage in advance (i.e., before commencing the leave). In this case, the employee could elect to reduce his or her final pre-leave paycheck with pre-tax salary reduction contributions that will cover his or her share of the contributions for all or a part of the expected duration of the leave.
Two important limitations:
- The pre-pay option cannot be the sole option offered. So if the company offers this approach, it will have to also offer at least one of the other two.
- Pre-pay cannot be used to pay for coverage in a subsequent plan year on a pre-tax basis. If the leave is expected to spill over into a subsequent plan year, the employee could only pre-pay on a pre-tax basis for the part of the leave in the first plan year.
- Pay-as-you-go: Under this approach, the employee pays for his or her share of the cost of coverage in installments during the leave. If the leave is paid leave, the employee could pay on a pre-tax basis from the payments he or she is receiving. Otherwise, these payments would have to be made on an after-tax basis (e.g., by check).
- Catch-up: In this approach, the employee agrees in advance to make catch-up contributions upon returning from leave for the cost of coverage during the leave. Although not clear, it appears that catch-up contributions may be made on a pre-tax basis even if the leave straddles two plan years.
In general, employees on paid leave will probably want to go with option #2. Employees on an unpaid leave will probably want option #1 or #3 so that they can pay on a pre-tax basis.
Employers can terminate coverage for an employee on FMLA leave if the employee’s payment of his or her share of the premium is more than 30 days late. In order to drop coverage on this basis, the employer must provide written notice to the employee that payment hasn’t been received. This notice must be mailed at least 15 days before coverage is to cease, and it must advise that coverage will be dropped on a specific date at least 15 days after the date of the letter.
Upon return from leave, the employer must restore any benefits that were terminated during the leave unless otherwise elected by the employee. This requirement applies even if the employee dropped or lost coverage (for failure to pay) during the leave. Furthermore, the employee cannot be required to satisfy the plan’s waiting period (if any) again upon return.
If the employee fails to return from FMLA leave, the employee (and any covered dependent) experiences a COBRA qualifying event as of the last day of the FMLA leave.
- Non-Protected Leave: Company Policy
Default Position: Terminate Coverage
If the leave is not protected (or the period of protected leave expires and the employee does not return), there is no requirement to continue offering active coverage to the employee. Therefore, the default position after the protected leave period has ended would be to terminate active coverage and offer COBRA (for health benefits). In most cases, the employee will not have terminated at this point, so the COBRA qualifying event will either be loss of coverage due to reduction in hours or failure to return from protected leave.
More Common Policy: Continue Active Coverage for Some Period (Typically Six Months)
In some industries (particularly tech companies), it is more common to have a generous leave policy that continues active coverage for some period beyond the legal requirements.
The most common approach I see for these types of companies is to extend active coverage until the later of:
- The end of the legally required period for protected leave (which in some rare cases can extend up to seven months for extended pregnancy disability leaves followed by CFRA baby bonding); or
- Six months following the start of the leave.
At the end of that period, active coverage will terminate and COBRA is offered. This approach needs to be approved by the insurance carriers, but they generally take no issue with active coverage leave extensions for up to six months.
Extremely Generous Policy: Beyond Six Months
In some cases, I have seen very generous employers want to continue active coverage for an even longer period. In that scenario, you need to be sensitive to the insurance carrier limitations. In general, the carrier has agreed to cover only active eligible employees, those on protected leave, and COBRA qualified beneficiaries. They have not agreed to cover inactive employees who are not on protected leave or COBRA. However, in almost all cases the carrier is fine with a leave policy to extend active coverage for up to six months (per the description above).
Insurance carriers generally will not agree to extend active coverage beyond six months. Therefore, if the employer wishes to be more generous than the policy described above, they need to get creative.
There are two main ways the ultra-generous companies handle this:
- Offer to pay for COBRA for the employee for some or all of the COBRA maximum coverage period. This is still permitted for fully insured plans because the ACA fully insured nondiscrimination rules are on indefinite hiatus. (We generally suggest being clear in any communication that if those ACA nondiscrimination rules are issued and become effective during the COBRA term, the employer will immediately cease the COBRA contributions.); or
- Pay the employee some amount in standard compensation that’s intended to cover the cost of COBRA. The downside of this approach is the compensation is taxable, so the company would need to gross up employees to make them whole. The payment also could not be conditioned on the COBRA election. If the plan is self-insured, this is frequently the only method that works to avoid violating the §105(h) nondiscrimination rules applicable only to self-insured plans.
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