Health Coverage for Employees on Military Leave
By Brian Gilmore | Published July 10, 2020
Question: What are the health plan coverage rights for employees going on military leave?
Short Answer: Employers need to offer USERRA continuation coverage to employees who lose health plan coverage because they are called to active duty. Employers that are ALEs subject to the ACA employer mandate should take extra precautions in determining if and when employees will lose active coverage.
General Rule Upon Start of Military Leave: Loss of Active Coverage
The default position is that an employee who goes on military leave will lose active health coverage as a result of the reduction in hours.
Loss of Active Coverage Creates USERRA 24-Month Qualifying Event
Unlike other forms of protected leave (e.g., FMLA, CFRA, PDL) USERRA does not require employers to continue active health coverage. Rather, it provides a COBRA-like structure for continuation coverage that permits the employee to continue coverage for up to 24 months (rather than 18 months through federal COBRA).
When an employee loses coverage under a group health plan because the employee leaves work to perform uniformed service, the employee (and the employee’s spouse and dependent children who lose coverage) will be entitled to the protections of both COBRA and USERRA. Where the requirements of COBRA and USERRA differ, the employee or dependent is entitled to protection under the law that gives the employee or dependent the greater benefit, which is generally USERRA. The COBRA and USERRA maximum coverage periods run concurrently.
Employees losing active coverage as a result of a military leave should generally receive both a COBRA election notice and a USERRA election notice outlining their rights to continuation coverage under both legal frameworks.
Note: The loss of coverage would also create a HIPAA special enrollment event if the employee is eligible for coverage under a plan sponsored by the employer of a spouse, domestic partner, or parent. For more details, see our previous post: HIPAA Special Enrollment Events.
USERRA Cost of Coverage
The USERRA cost of coverage rules depend on the length of military leave:
Employee Performs Service in the Uniformed Services Fewer Than 31 Days
The employee cannot be required to pay more than the active employee-share of the premium.
Employee Performs Service in the Uniformed Services 31 or More Days
The employee cannot be required to pay more than 102% of the cost of coverage (the standard COBRA rate).
Reinstatement in Active Coverage Upon Return from USERRA Leave
If the employee’s active health coverage terminated as a result of the military leave, USERRA provides that the employer must reinstate the employee in active coverage upon reemployment.
Accordingly, the employer cannot impose a waiting period upon an employee’s return to work—regardless of whether the employee continued coverage through USERRA while on the military leave.
Reason #1 Active Coverage May Continue During Military Leave: The Look-Back Measurement Method
Applicable Large Employers (ALEs) subject to the ACA employer mandate may use one of two measurement methods to determine employees’ full-time status:
The monthly measurement method; or
The look-back measurement method.
Under the look-back measurement method, an employee who has full-time status during a stability period and changes employment status to working part-time will continue to be a full-time employee for ACA purposes for the remainder of the current stability period (generally the plan year). The employer cannot drop the employee from coverage upon the change in employment status without creating potential ACA employer mandate pay or play penalty liability.
Furthermore, USERRA leave is designated as “special unpaid leave” under the ACA employer mandate rules. This means that even if the leave is unpaid, employers utilizing the look-back measurement method to determine employees’ full-time status must either:
Exclude the period of USERRA leave from the measurement period when determining the employees’ average hours of service; or
Impute hours of service for the measurement period during the USERRA leave such that the employee is credited with hours of service at a rate equal to the average weekly hours of service for weeks that were not part of the USERRA leave.
Paid USERRA leave would count as standard hours of service under the regular hours of service rules applicable to paid leave.
The result is that employees who initiate a military leave while in a stability period as full-time continue to be full-time for ACA employer mandate purposes through the remainder of that stability period (generally the plan year). Such employees may also average at least 30 hours of service per week over the measurement period (when adjusted for the special unpaid leave rules) and thereby need to be offered coverage at open enrollment (the administrative period) for the entire next plan year (the stability period) to avoid potential ACA employer mandate penalties.
For more details, see our prior post: Leave Rules Under the ACA Look-Back Measurement Method.
Reason #2 Active Coverage May Continue During Military Leave: Employer Non-Protected Leave Policies
Many employers have the policy to continue active coverage for some period for employees on leave. Carriers will generally permit extensions of active coverage pursuant to an employer’s leave policy of up to six months.
Employers with this type of leave policy to continue active coverage where not required by law would generally apply the same continuation to an employee on military leave. Alternatively, many employers have leave policies specific to military leaves that may be more generous than a standard non-protected leave.
For more details, see our Newfront Health Benefits While on Leave Guide.
Health FSA: HEART Act Qualified Reservist Distribution
Section 125 cafeteria plans are permitted (but not required) to offer employees who are called to active duty the opportunity to cash-out their health FSA balance as a taxable distribution. This is referred to as a “qualified reservist distribution” or QRD. It is the only time a taxable distribution of a health FSA balance is permitted. QRDs are available to health FSA participants only if the cafeteria plan document includes the option in its written terms.
If the company’s Section 125 plan document permits QRDs, any employee who is ordered or called to active duty for a period of 180 days or more (or for an indefinite period) may request a QRD. The employer must first receive a copy of the order or call to active duty before processing the QRD to confirm the duration will meet this requirement.
The cafeteria plan may provide for any of the following three options as QRDs to eligible participants:
The entire amount of the employee’s health FSA election (reduced by any reimbursements received as of the date of the QRD request);
The amount contributed to the health FSA by the employee as of the date of the QRD (reduced by any reimbursements received as of the date of the QRD request); or
Any other amount that does not exceed the entire amount of the employee’s health FSA election (reduced by any reimbursements received as of the QRD request).
If the cafeteria plan document does not specify one of these approaches, the second option above will apply by default.
Employers should provide a notice describing these QRD rights to any employee going on military leave who will qualify for a QRD.
For more details on employee benefits leave issues generally, see our Newfront Health Benefits While on Leave Guide.
20 CFR §1002.164:
What health plan coverage must the employer provide for the employee under USERRA?
If the employee has coverage under a health plan in connection with his or her employment, the plan must permit the employee to elect to continue the coverage for a certain period of time as described below:
(a) When the employee is performing service in the uniformed services, he or she is entitled to continuing coverage for himself or herself (and dependents if the plan offers dependent coverage) under a health plan provided in connection with the employment. The plan must allow the employee to elect to continue coverage for a period of time that is the lesser of:
(1) The 24-month period beginning on the date on which the employee’s absence for the purpose of performing service begins; or,
(2) The period beginning on the date on which the employee’s absence for the purpose of performing service begins, and ending on the date on which he or she fails to return from service or apply for a position of employment as provided under sections 1002.115-123 of these regulations.
(b) USERRA does not require the employer to establish a health plan if there is no health plan coverage in connection with the employment, or, where there is a plan, to provide any particular type of coverage.
(c) USERRA does not require the employer to permit the employee to initiate new health plan coverage at the beginning of a period of service if he or she did not previously have such coverage.
20 CFR §1002.166:
How much must the employee pay in order to continue health plan coverage?
(a) If the employee performs service in the uniformed service for fewer than 31 days, he or she cannot be required to pay more than the regular employee share, if any, for health plan coverage.
(b) If the employee performs service in the uniformed service for 31 or more days, he or she may be required to pay no more than 102% of the full premium under the plan, which represents the employer’s share plus the employee’s share, plus 2% for administrative costs.
(c) USERRA does not specify requirements for methods of paying for continuing coverage. Health plan administrators may develop reasonable procedures for payment, consistent with the terms of the plan.
20 CFR §1002.168:
If the employee’s coverage was terminated at the beginning of or during service, does his or her coverage have to be reinstated upon reemployment?
(a) If health plan coverage for the employee or a dependent was terminated by reason of service in the uniformed services, that coverage must be reinstated upon reemployment. An exclusion or waiting period may not be imposed in connection with the reinstatement of coverage upon reemployment, if an exclusion or waiting period would not have been imposed had coverage not been terminated by reason of such service.
DOL EBSA Retirement and Health Care Benefits FAQ for Reservists:
Health Benefits Q’s & A’s
My family had health coverage through my employer when I was called for active duty in the military. What are my rights to health coverage now?
If you are on active duty for more than 30 days, you and your dependents should be covered by military health care. For more information on these programs contact your military unit.
In addition, two laws, COBRA and USERRA, protect your health coverage rights. Both laws generally allow individuals who leave work for military service to continue coverage for themselves and their dependents under an employment-based group health plan.
COBRA provides health coverage continuation rights to employees and their families after an event such as a reduction in employment hours. COBRA provides for 18 months of coverage, with further extensions for certain events. COBRA applies to group health plans maintained by employers with 20 or more employees. If an employer is too small to be subject to COBRA, state law may require the plan’s insurer to provide some continuation coverage.
USERRA is intended to minimize the disadvantages that occur when a person needs to be absent from civilian employment to serve in the uniformed services. USERRA applies to all employers, regardless of size, and provides for up to 24 months of continuation health coverage.
If military service is for 30 or fewer days, you and your family can continue coverage at the same cost as before your short service. If military service is longer, you and your family may be required to pay as much as 102 percent of the full premium for coverage. If your health plan is covered by COBRA, you should receive a notice from the plan explaining your rights.
The Health Insurance Portability and Accountability Act (HIPAA) may give you and your family rights to enroll in other group health plan coverage if it is available to you (for example, if your spouse’s employer sponsors a group health plan). You and your family have this opportunity to enroll regardless of the plan’s otherwise applicable enrollment periods.
However, to qualify, you must request enrollment in the other plan (for example, your spouse’s plan) within 30 days of losing eligibility for coverage under your employer’s plan. After special enrollment is requested, coverage is required to be made effective no later than the first day of the first month following your request for enrollment. If you are on active duty more than 30 days, coverage in another plan through special enrollment may be cheaper than continuation coverage because the employer often pays a part of the premium.
Another option is enrolling in coverage through the Health Insurance Marketplace (Marketplace). The Marketplace offers comprehensive health coverage and you may be eligible for a tax credit that will lower your monthly premiums and cost-sharing reductions that will lower your out-of-pocket costs for deductibles, coinsurance, and copayments. For Marketplace coverage, you must select a plan either within 60 days before losing coverage or within 60 days after losing coverage. For more information, visit HealthCare.gov.
Note: When considering your health coverage options, you should examine the scope of the coverage (including benefit coverage and limitations), premiums, cost-sharing (including copayments and deductibles), and waiting periods for coverage.
My family and I had health coverage under my employer’s group health plan before I was called for active duty. We let this coverage lapse while I was away and took military health coverage. When I return to my employer from active duty, what are our rights to health coverage under my old plan?
Under USERRA, you and your family should be able to reenter your employer’s health plan. In addition, your plan generally cannot impose a waiting period or other exclusion period if health coverage would have been provided were it not for military service. The only exception to USERRA’s prohibition of exclusions is for an illness or injury determined by the Secretary of Veterans Affairs to have been incurred in or aggravated during performance of service in the uniformed services, which is covered by the military health plan or by the Department of Veterans Affairs.
Treas. Reg. §54.4980H-3(d)(1)(vii):
(vii) Change in employment status. Except as provided in paragraph (f)(2) of this section, if an ongoing employee experiences a change in employment status before the end of a stability period, the change will not affect the application of the classification of the employee as a full-time employee (or not a full-time employee) for the remaining portion of the stability period. For example, if an ongoing employee in a certain position of employment is not treated as a full-time employee during a stability period because the employee’s hours of service during the prior measurement period were insufficient for full-time-employee treatment, and the employee experiences a change in employment status that involves an increased level of hours of service, the treatment of the employee as a non-full-time employee during the remainder of the stability period is unaffected. Similarly, if an ongoing employee in a certain position of employment is treated as a full-time employee during a stability period because the employee’s hours of service during the prior measurement period were sufficient for full-time-employee treatment, and the employee experiences a change in employment status that involves a lower level of hours of service, the treatment of the employee as a full-time employee during the remainder of the stability period is unaffected.
Treas. Reg. §54.4980H-1(a)(44):
(44) Special unpaid leave. The term special unpaid leave means—
(i) Unpaid leave that is subject to the Family and Medical Leave Act of 1993 (FMLA), Public Law 103-3, 29 U.S.C. 2601 et seq.;
(ii) Unpaid leave that is subject to the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), Public Law 103-353, 38 U.S.C. 4301 et seq.; or
(iii) Unpaid leave on account of jury duty.
Treas. Reg. §54.4980H-3(d)(6)(i)(B):
(B) Averaging method for special unpaid leave. For purposes of applying the look-back measurement method described in paragraph (d) of this section to an employee who is not treated as a new employee under paragraph (d)(6)(i) of this section, the employer determines the employee’s average hours of service for a measurement period by computing the average after excluding any special unpaid leave during that measurement period and by using that average as the average for the entire measurement period. Alternatively, for purposes of determining the employee’s average hours of service for the measurement period, the employer may choose to treat the employee as credited with hours of service for any periods of special unpaid leave during that measurement period at a rate equal to the average weekly rate at which the employee was credited with hours of service during the weeks in the measurement period that are not part of a period of special unpaid leave. There is no limit on the number of hours of service required to be excluded or credited (as the case may be) with respect to special unpaid leave. For purposes of this paragraph (d)(6)(i)(B), in computing the average weekly rate, employers are permitted to use any reasonable method if applied on a consistent basis. In addition, if an employee’s average weekly rate under this paragraph (d)(6)(i)(B) is computed for a measurement period and that measurement period is shorter than six months, the six-month period ending with the close of the measurement period is used to compute the average hours of service.
(h) Special rule for unused benefits in health flexible spending arrangements of individuals called to active duty.
(1) In general.
For purposes of this title, a plan or other arrangement shall not fail to be treated as a cafeteria plan or health flexible spending arrangement (and shall not fail to be treated as an accident or health plan) merely because such arrangement provides for qualified reservist distributions.
(2) Qualified reservist distribution.
For purposes of this subsection, the term “qualified reservist distribution” means any distribution to an individual of all or a portion of the balance in the employee’s account under such arrangement if—
(A) such individual was (by reason of being a member of a reserve component (as defined in section 101 of title 37, United States Code)) ordered or called to active duty for a period in excess of 179 days or for an indefinite period, and
(B) such distribution is made during the period beginning on the date of such order or call and ending on the last date that reimbursements could otherwise be made under such arrangement for the plan year which includes the date of such order or call.
IRS Notice 2008-82:
Employees Who May Receive QRDs
An employee who is, by reason of being a member of a reserve component (as defined in 37 U.S.C. § 101), ordered or called to active duty for a period of 180 days or more or for an indefinite period may request a QRD. An individual ordered or called to active duty before June 18, 2008 is eligible for a QRD if the individual’s period of active duty continues after June 18, 2008 and meets the duration requirements in this notice. A QRD may not be made based on an order or call to active duty of any individual other than the employee, including the spouse of the employee.
After an employee requests a QRD and before the employer may distribute an amount, the employer must first receive a copy of the order or call to active duty. An employer may rely on the order or call to determine the period that the employee has been ordered or called to active duty. If the order or call specifies that the period of active duty is for 180 days or more or is indefinite, the employee is eligible for a QRD, and the employee’s eligibility is not affected if the actual period of active duty is less than 180 days or is otherwise changed.
If the period specified in the order or call is less than 180 days, a QRD is not allowed. However, subsequent calls or orders that increase the total period of active duty to 180 days or more will qualify an employee for a QRD. Thus, for example, if an employee is ordered or called to active duty for 120 days, and his or her order or call is subsequently extended for an additional 60 days, that individual qualifies for a QRD.
Amount Available As A QRD
If a cafeteria plan provides for QRDs, the cafeteria plan amendment should indicate how the plan will determine an employee’s health FSA balance for purposes of making QRDs. See uniform coverage rules in Prop. Treas. Reg. § 1.125-5(d). The cafeteria plan may provide that the amount available as a QRD will be:
(1) the entire amount elected for the health FSA for the plan year minus health FSA reimbursements received as of the date of the QRD request;
(2) the amount contributed to the health FSA as of the date of the QRD request minus health FSA reimbursements received as of the date of the QRD request; or
(3) some other amount (not exceeding the entire amount elected for the health FSA for the plan year minus reimbursements).
If the cafeteria plan amendment does not indicate how the plan will determine the amount available as a QRD, then the amount available shall be the amount contributed to the health FSA as of the date of the QRD request minus health FSA reimbursements received as of the date of the QRD request.
A QRD may only be made with respect to an employee’s health FSA balance in existence on or after June 18, 2008. A QRD may not be made with respect to amounts (1) forfeited on or before June 18, 2008, (2) attributable to a prior plan year (including a plan year ending on or before June 18, 2008), or (3) attributable to non-health FSAs.
Lead Benefits Counsel, VP, Newfront
Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.Connect on LinkedIn