The effect of COVID-19 on employer-sponsored health plans: a comprehensive guide
The below information is current as of the publication date listed. Because COVID-19 response measures on all fronts are continually evolving, clients should stay alert to new developments and consult with counsel on any critical questions.
Businesses across the country are grappling with the effects of the shutdown of operations resulting from the COVID-19 pandemic. Employers have been left with a number of questions regarding health care coverage continuation, employer assistance payments, the employer penalty under the Affordable Care Act, and health plan coverage for COVID-19 testing and treatment. This article summarizes the employee benefit issues employers face when employees are furloughed, laid off, or even terminated as a result of this pandemic. Due to the rapidly changing nature of these issues, employers should contact their benefits providers or seek experienced legal counsel who can provide practical solutions and guidance on compliance obligations related to employee benefits during this challenging time.
A. Employer-sponsored health insurance coverage mandate
All employer-sponsored major medical health plans (including insured, self-insured, grandfathered and non-grandfathered) are required to cover COVID-19 testing without cost-sharing. There are caveats that apply to the mandate (e.g., physician referral required for testing), but generally, an employer-sponsored health plan must cover COVID-19 testing and items and services related to office visit, telehealth session, urgent care visit, or emergency room visit for COVID-19 diagnostics that result in an order for or administration of a COVID-19 test.
Documentary Compliance. The COVID-19 mandate is a material modification requiring that a Summary of Material Modifications (SMM) be distributed to plan participants within 210 days after the close of the plan year in which the modification was adopted, although we recommend providing the SMM as soon as possible.
B. Health Savings Accounts unaffected by COVID-19 coverage
IRS Notice 2020-15 provides that High-Deductible Health Plans (HDHPs) will not fail to maintain HDHP status if they provide medical care services and items purchased related to testing for and treatment of COVID-19 prior to satisfaction of the applicable minimum deductible. As a result, participants with Health Savings Accounts (HSAs) continue to maintain eligibility under the HSA rules even though they receive dollar-first coverage under a HDHP.
C. Health plan coverage during layoffs, furloughs and reduction of hours
Generally, health plan coverage ends upon a reduction of hours or termination of employment resulting in continued coverage under the Consolidated Omnibus Budget and Reconciliation Act of 1985 (COBRA). However, active coverage will continue in the following cases:
Protected leave under Family Medical Leave Act (FMLA), or similar state law
- Employers must maintain active group health plan coverage
- Employers must maintain active health plan coverage for an employee on a protected leave
- Employee cannot be required to pay more than the active employee-share of the premium while on protected leave
- Open enrollment rights apply in the same manner as active employee
Employee right to terminate coverage
- FMLA requires that employees be provided the option to drop health plan coverage during the leave (e.g., because employee does not want to pay)
- IRS Section 125 rules permit election change to revoke coverage election during a period of unpaid leave
- Coverage will cease for the leave period if employee makes the election to terminate coverage
- Upon return, employee still has the right to be reinstated in coverage on same terms prior to leave (no waiting period, etc.)
The Section 125 rules provide three ways for employers to administer collection of the employee-share of the premium for coverage during an FMLA leave:
- Employee prepays the coverage cost
- Employee pays for coverage on an after-tax basis during the leave period
- Employee repays upon return from leave
Health Flexible Spending Account (FSA): group health plan with employee contributions
- Coverage (i.e., ability to incur reimbursable claims) remains in effect during the protected leave period unless the employee revokes coverage
- Contributions handled through one of the three methods outlined above
- Employee on unpaid FMLA leave must have option to revoke health FSA coverage (unless catch-up option is offered—in which case employer may require it)
Employee revokes health FSA coverage during leave. Health expenses incurred during the leave period are not eligible for reimbursement. Upon return, employee has two options:
- Full Election: Employee resumes election amount in effect before leave and makes up the unpaid contributions during leave (but no coverage during leave period)
- Reduced Election: Employee does not make up the unpaid contributions upon return, resulting in lower total election (i.e., coverage) amount available for the year
HRA: Group Health Plan without Employee Contributions
- Identical ability to incur/reimburse claims while on leave as if active employee
HSA: Not a Group Health Plan
- Not subject to leave laws—may discontinue contributions during leave period
Utilizing the look-back measurement method to determine full-time status
Applicable Large Employers (ALEs) subject to the Affordable Care Act’s (ACA) Employer Mandate should utilize the look-back measurement method to determine full-time status. The look-back measurement method provides an alternative to the monthly measurement method under the ACA’s employer mandate. During the employer-established look-back period, employers test whether an employee averages 30 hours of service per week in a measuring period to lock in full-time or part-time status for the associated stability period. Employers utilizing the look-back measurement period method must treat furloughed or laid off employees as active full-time employees through the end of the stability period.
Non-protected leave policy to continue active coverage
- Any leave not protected by FMLA or other state equivalents
- Many reasons employers may make non-protected leaves available:
- Employer is not subject to FMLA
- Employee is not eligible for FMLA
- Leaves that extend beyond protected leave period (e.g., longer new child leaves)
- In many cases, employers will be very accommodating in these situations (i.e., provide some form of company leave, not terminate EE for job abandonment)
- Non-Protected Leaves in the COVID-19 Landscape
- Employers can classify a furlough as a leave for these purposes and continue coverage under a non-protected leave policy
- Always make sure to have carrier approval for active coverage continuation
D. Employer payments for employee financial assistance
Section 139 was added to the Code in 2001 after 9/11 and may permit employers to make “qualified disaster relief payments” to employees to assist the employees in managing the COVID-19 crisis so long as the payment reimburses or pays the employee for “reasonable and necessary personal, family, living, or funeral expenses” incurred as a result of COVID-19. The payments are tax-free to the employees, but fully deductible to the employer. It is important to note that Section 139 applies to any “federally declared disaster” as defined in Section 165. Section 165, in turn, defines such a disaster as any disaster determined by the President to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. On March 13, President Trump issued an emergency declaration under the act in response to the ongoing COVID-19 pandemic and instructed the IRS to delay the April 15 tax deadline. Thus, the COVID-19 pandemic appears to satisfy the requirement in Section 139 of a federally declared disaster. The Code Section 139 option may be an enormous help to employees impacted by COVID-19; however, there is some risk in utilizing Code Section 139 since it has not yet been used for a pandemic crisis.
Saxton & Stump attorney Sarah Ivy is available to further discuss this topic and how our Employee Benefits and Executive Compensation Group can review your health plans and benefits packages to provide guidance on how changes due to COVID-19 impact your plan sponsors, employee benefit plans and plan participants.
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