Understanding the Impact of and Guidance to Navigating Employer Furloughs Due to the Coronavirus
What is a furlough?
For purposes of this article, we are defining a furlough as an employer-implemented mandatory leave of absence from work, typically without pay – very similar to a temporary layoff or approved unpaid leave of absence. Note that different employment-related rules will apply to exempt and non-exempt employees in this circumstance. For details on the employment ramifications of a furlough and other COVID-19-related issues, please review our Labor & Employment team’s Q&As. Also note that the status of a furlough may change as additional guidance is issued, so stay tuned for ongoing updates.
Health Plans
Is there new legislation I should be aware of?
Yes, the Families First Coronavirus Response Act (the “Act”), which was signed by the President on March 19, 2020, requires group health plans and health insurers offering group or individual coverage to cover testing for COVID-19 without any cost sharing (i.e., deductibles, copayments, coinsurance) and without imposing prior authorization (or other medical management) requirements. This includes the office, telehealth, urgent care, or emergency room visit that results in the order for the test or the administration of the test, but only to the extent that the items/services relate to the test or to the evaluation of the patient for the purpose of determining the need for the test. This requirement applies to items/services furnished during the emergency period on or after the date of the Act’s enactment. This law imposes similar requirements on federal programs, such as Medicare, Medicaid, Tricare, etc.
The Act will apply to all employer-sponsored health plans, including fully-insured, self-funded, and grandfathered plans. Employers should reach out to carriers and third party administrators to determine if their health plans will need to be amended to comply with this new law. Several health plans may already provide coverage for COVID-19 testing at no cost to the plan member. For fully insured health plans, some states (e.g., California, New York, and Washington) have mandated that health insurers cover COVID-19 testing and waive all related cost-sharing requirements (e.g., deductible, copay, coinsurance). Some health insurance companies voluntarily decided to do this in states where they were not legally compelled to do so. In addition, the IRS recently provided guidance that permits high deductible health plans (HDHPs), both fully insured and self-funded, to waive deductibles that would otherwise apply to COVID-19 testing and treatment without impacting HDHP status, meaning that HDHP members can still receive and make contributions to a health savings account (HSA) despite this pre-deductible benefit (see Foley article here on this topic).
If an employer-provided health plan does not currently cover COVID-19 testing at no cost to the plan member, an employer should work promptly with their carrier/administrator to make sure that it gets done. Employers will also have to consider whether plan amendments and summaries of material modifications need be sent to plan participants to notify participants of the ability to receive cost-free COVID-19 screenings under the plan.
Will a furlough trigger a loss of health plan coverage?
It depends on the terms of your plan.
A furlough, in and of itself, is not a COBRA qualifying event. However, if the furlough results in a reduction of hours that causes a loss of coverage, then it will trigger COBRA.
Most health plans (but not all) provide that only regular, active employees working 30+ hours per week are eligible for coverage. If their position changes such that they drop below the 30-hour threshold (i.e., part-time) or are laid off/furloughed, it would typically trigger a loss of coverage under the health plan and COBRA would be triggered (if the employer has at least 20 employees; otherwise a state mini-COBRA law could be triggered).
If employers are providing coverage to employees based on service completed in a prior period, e.g., the 2019 measurement period, then a decrease in hours as a result of a furlough in 2020 may not impact eligibility for coverage now. Note, however, that reduction of hours in 2020 may impact whether these employees are eligible for coverage in 2021. Employers may amend their plans to impute hours during the furlough period, subject to insurer and collective bargaining consent requirements, if they would like to avoid this result.
Can we continue coverage for employees on furlough who lose coverage?
Yes, but you may need to make some changes to your plan.
To avoid adverse impacts to employees, employers may:
- Amend their plans to extend active employee coverage to part-time employees and/or employees who are laid off or furloughed for a specified period of time. If the plan is fully-insured, this will require insurance company consent. If the plan is self-funded, the plan document will have to be amended and, if the employer has stop-loss insurance, the stop-loss insurer must consent to the amendment.
- Subsidize COBRA premiums for a specified period of time. Under this approach, normal COBRA procedures should be followed, but the cost of the coverage would be reduced. The employer subsidy would not be treated as taxable wages unless the health plan is self-funded and the subsidy favors highly compensated employees.
Any amendment would also be subject to collective bargaining-related consent, if applicable.
We have a self-funded group health plan or fully-insured plan subject to HIPAA. Does HIPAA prevent us from disclosing that an employee has tested positive for COVID-19?
Generally, no. HIPAA only prevents disclosure of protected health information from the plan itself. If the employer is not a health care provider (and, therefore, subject to HIPAA as an entity), it is generally not subject to HIPAA regarding this type of disclosure unless the employer has gotten its information from the health plan (which they are probably not, since the health plan would likely only have records that a COVID-19 test was performed, but not the outcome of the test). Note, however, that protections under the Americans with Disabilities Act, the Genetic Information Nondiscrimination Act, and others do apply.
Other Welfare Benefits
What happens to flexible spending accounts – medical flexible spending accounts and dependent care flexible spending accounts – during a furlough?
If employees do not have current compensation, then their contributions to flexible spending accounts will not continue. However, those amounts – the full amount of any medical flexible spending accounts and contributions made to date for dependent care flexible spending accounts – should still be made available. Note, for dependent care flexible spending accounts, that expenses can only be reimbursed for dependent care expenses that allows the employee to work or look for work. So, by definition, a furloughed employee is generally not incurring eligible dependent care expenses while on furlough. There is an exception that allows dependent care expenses incurred during short-term, temporary absences to be reimbursable. The Internal Revenue Service has said whether an absence is short-term and temporary depends on the facts and circumstances, but acknowledged that a two-week time period would be considered short-term and temporary. Until further guidance is issued, nondiscrimination and coverage testing will still apply.
Do employees have to exhaust sick leave before receiving STD benefits?
At the risk of sounding like a broken record, this all depends on the terms of the plan. Generally speaking, no – employees are not required to exhaust sick leave before becoming eligible for STD. If the plan has a waiting/exclusion period before STD coverage starts, then most employees will take that approach, but the two benefits are generally not linked together.
Can we amend our STD plan to waive the waiting/exclusion period?
Yes, that is absolutely fine if it is self-funded (most are); just double check that the employer does not have any third party notification requirements, e.g., the LTD carrier.
If the plan is fully-insured, then you will need carrier consent to make this change, which will almost certainly result in increased premiums.
What happens to LTD and Life Insurance coverage if employees are furloughed?
It depends on the terms of the policy. If eligibility is related to number of hours worked, or being on “active payroll,” then a furlough may result in loss of coverage. If eligibility is only related to employment status, then the furlough may not result in a loss of coverage. We advise that employers closely review the terms of their policy to determine whether coverage will be lost and/or if it includes any special layoff/furlough rules. Insurers may be willing to offer some flexibility to avoid loss of coverage. If coverage will be lost, the policy should also be reviewed to see if there are conversion rights, and if so, whether the employer is obligated to provide notice of those conversion rights or otherwise provide administrative support for those rights.
General Retirement Plan Issues
Will a furlough impact vesting service?
It depends on how vesting service is defined and measured. If the plan defines vesting service as 1,000 hours of service, then a furlough may interfere with vesting. If the plan uses elapsed time, then vesting may not be impacted because a furlough does not qualify as a termination of employment for retirement plan purposes, and any leave of absence of less than 12 months continues to count as vesting service.
If the furlough is long-term, then an employer will need to determine whether there has been a “partial termination” of the plan. Under Internal Revenue Code (“Code”) Section 411(d), a plan is considered partially terminated if there is a significant change to the plan or a significant corporate event that affects the rights of employees to vest in their plan benefits. The IRS examines the facts and circumstances of each situation in making its determination, but does utilize a 20% turnover rate presumption for this purpose. Although a furlough is not a severance from employment, the IRS could take the position that a partial plan termination has occurred if more than 20% of the workforce is furloughed on a long-term basis in connection with COVID-19. If a partial plan termination occurs, then the plan sponsor must 100% vest the “affected participants.” One potential way to avoid this result is to credit imputed service during the furlough so you can take the position that the furlough did not adversely impact participants’ rights to vest in their plan benefits.
Of course, employers may elect to accelerate vesting for some or all contributions – for any reason and at any time, as long as the acceleration is nondiscriminatory. By accelerating vesting, employers may enable their employees to have access to more money in their plans if needed now.
Is there any relief for contribution, testing or filing deadlines?
No, at this time, all deadlines continue to apply, including deadlines for making and transmitting contributions to the plan (including quarterly minimum funding contributions to a defined benefit pension plan), Form 5500 filings, and all coverage and nondiscrimination testing requirements.
Can I waive the requirement that spousal consent be notarized and/or witnessed by a plan representative due to “social distancing” guidelines?
No, relief has not been provided, so this qualified plan requirement still applies.
Defined Contribution (401(k)) Plan Issues
Will employee contributions stop?
Yes, if employees are not being paid during a furlough, then employee contributions to the 401(k) will stop – because they are no longer receiving compensation from which contributions may be made and/or because they no longer qualify as eligible employees because they are no longer on active payroll. If employees are being paid, then their contributions will continue; however, they may want to consider adjusting their elections, either up or down, depending on their personal circumstances.
What about employer contributions?
It depends. Matching contributions will stop if employee contributions stop. However, nonelective contributions may continue, depending on how the plan is drafted.
Can my employees take hardship withdrawals as a result of this national emergency?
While the IRS permits hardship withdrawals related to a FEMA-declared disaster, this is not the situation right now; while FEMA has declared coronavirus to be a national emergency, that is not the same as a federally-declared disaster. So, to permit these distributions, plan sponsors have to be comfortable deviating from the IRS-prescribed list of permissible hardship events.
If a plan sponsor would like to add a non-safe harbor hardship withdrawal right in connection with COVID-19 and/or furloughs and layoffs, then a plan amendment is likely required. We would also recommend consulting with the plan record-keeper to confirm that they have the capacity and ability to support these requests, which may be plentiful.
Also remember that the distributions must meet all other IRS-prescribed requirements, including
- Limiting the distribution to an amount that does not exceed the amount of the need, plus taxes on the withdrawal.
- Confirming that the employee has obtained all other withdrawals available under the plan, and the employee has represented in writing that he or she has insufficient cash or other liquid assets reasonably available to satisfy the need. Plan administrators are entitled to rely on the representation unless they have actual knowledge to the contrary. This will require the company to stay abreast of law changes. For example, the recent bill passed by the House mandates private employers with less than 500 employees to provide paid time-off for up to 80 hours for certain qualifying absences. Thus, if an employee claims a hardship withdrawal due to loss of a spouse’s paycheck, and the plan administrator knows that the spouse works for a small employer, then we recommend delaying approval of the withdrawal unless and until the spouse has been absent from work for two weeks.
What about 401(k) plan loans – how will that work?
There are generally two issues here – whether employees may take loans while on furlough and whether loan payments can be suspended during a furlough. As with most of these answers, this depends on the terms of the plan/loan policy.
If eligibility to take loans is based on employment status or status as a participant (i.e., an employee with a plan balance), then employees may continue to take loans while on furlough. If eligibility is tied to status as an eligible employee, then employees may no longer be eligible. If the plan provides for more than one loan, employees who have not taken the maximum number of loans could consider using a new loan to “refinance” their existing loan(s), subject to the Code’s limit on the amount of participant loans (generally the lesser of $50,000 or half of the participant’s account balance).
Most loan policies will permit employees to continue to make payments during layoff, furlough, or approved leave of absence because a termination of employment has not occurred. Note, however, that repayment will be more challenging because payments will no longer be coming from payroll. Therefore, plan sponsors who would like to allow employees to continue to make payments outside of payroll should work with the plan’s record-keeper and participants to make alternate arrangements, and amend their plan/loan policy if needed.
Employers may also consider permitting employees to suspend loan repayments for up to one year during a furlough. Although Code Section 72(p) generally limits the maximum term for repaying a participant loan to five years (with an exception for principal residence loans) and requires at least quarterly repayments of principal and interest, based on level amortization over the loan term, the Code does provide an exception to the level amortization rule if an employee is under a bona fide leave of absence. Under this rule, the level amortization requirement will not apply for a period, not longer than one year that a participant is on a bona fide leave of absence, either without pay from the employer or at a rate of pay (after applicable employment tax withholdings) that is less than the amount of the installment payments required under the terms of the loan. However, the loan (including interest that accrues during the leave of absence) must be repaid by the latest permissible term of the loan and the amount of the installments due after the leave ends must not be less than the amount required under the terms of the original loan. If this option is not already contemplated under the terms of the plan or loan policy, an amendment to the plan or loan policy is needed.
Of course, if an employee misses a required loan payment during furlough, the payment may be made up in order to avoid a default, if permitted by the loan policy and in accordance with IRS guidance. The grace period on a loan payment generally extends to the end of the calendar quarter following the calendar quarter in which the loan payment was due, but a plan may have elected a shorter grace period so the plan document and loan policy should be consulted to confirm the actual default date for a loan.
Do my employees have any other options for getting funds out of their 401(k) accounts?
Yes, any other in-service withdrawal rights will be available, to the extent participants qualify. These may include withdrawal of after-tax or rollover contributions, age 59 ½ withdrawals, and matching contribution withdrawals.
Since a furlough does not qualify as a severance from employment for retirement plan purposes, employees will not be eligible to take a distribution from their account until they terminate employment.
Defined Benefit (Pension) Plans
Will benefits continue to accrue during a furlough?
This depends on plan design. If the benefit is compensation-based, then benefits will not continue to accrue if no eligible compensation is paid. The furlough may also impact final average earnings calculations.
In addition, hours of service will stop accruing during furlough periods because people are not getting paid, unless a particular plan imputes hours of service during such leave period. This will impact employees’ ability to accrue additional benefits and/or earn into early retirement eligibility, for example. Plan sponsors may amend the plan to impute service during a furlough, subject to collective bargaining, if applicable.
Is there any other impact on pension benefits?
For employees who are past normal retirement age, most pension plans have “suspension of benefits” rules. These rules typically provide that if a post-retirement age employee is working less than 40 hours per month (or 8 days a month), the employee will be owed a pension benefit for that month. Sometimes the benefit is paid on a current basis (during or shortly after the month in question) and sometimes the plan states that the value of that benefit will be added on to the benefits when ultimately commence at termination of employment. Plan sponsors should review their plans’ rules to determine if pension benefits will be owed to older employees who are furloughed, even though they haven’t yet terminated from employment.
Is there any funding relief considering the market and interest rate drops?
No, not at this time.
Can I suspend the lump sum feature in my pension plan?
No, you cannot simply suspend lump sum payments without risking disqualification of the plan and a breach of fiduciary duty claim because the lump sum is a protected right under Code Section 411(d)(6). The only time a suspension of a lump sum is permitted is if the plan’s funding percentage falls below 80% (only partial lump sums allowed) or 60% (generally, no lump sums allowed).
Nonqualified – Code Section 409A – Plans
Can employees change their deferral elections?
Generally, no.
Except in the case of an unforeseeable emergency, deferral elections are irrevocable for the year (or with respect to the particular item of compensation to which they apply) and may not be changed or cancelled. However, considering that employees on layoff or furlough do not have any current compensation, no additional amounts will be deferred during the furlough period.
For employees who may still have some compensation during this period, plans may be designed to permit employees to cancel their deferral election in the event of an “unforeseeable emergency.” Note, however
- Participants must provide sufficient documentation of an unforeseeable emergency (defined below)
- This is a true cancellation – so once an employee cancels an election for this reason, they cannot resume participation later in the year and will not be subject to evergreen election provisions. The best they could do is file a new deferral election for a subsequent year.
Under Code Section 409A, an unforeseeable emergency is defined as a severe financial hardship arising from (a) an illness or accident of a participant, or the participant’s spouse, beneficiary or dependent; (b) loss of the participant’s property due to casualty; or (c) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant. A participant cannot claim an unforeseeable emergency to the extent the emergency is or may be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the employee’s assets (to the extent such liquidation would not itself cause a severe financial hardship) or by cessation of plan deferrals. Examples in the regulations of unforeseeable emergencies are things such as eviction/foreclosure, unreimbursed medical expenses, or funeral expenses.
Can employees take a withdrawal from a deferred compensation plan?
Under the Code Section 409A rules, an employee is not permitted to take a withdrawal from the plan whenever they wish. The only exception is if the withdrawal is for an unforeseeable emergency, as discussed above. Any payment from their account must not exceed the amount reasonably necessary to satisfy the emergency need, taking tax consequences and the extent to which the participant has exhausted the ability to borrow money under tax qualified retirement plans into account, as well as any additional compensation that would be available if the participant is able to cancel their deferral elections as described above. While the current situation is not specifically contemplated by the IRS, we believe that it would be reasonable to take a payment to pay reasonable expenses arising due to the unforeseeable circumstances surrounding the COVID-19 pandemic, if all of the other requirements for an unforeseeable emergency withdrawal are met.
Will employees be able to “make up” missed contributions?
No, there would be no opportunity to make up for lost deferrals for the remainder of the year. Under Code Section 409A, deferral elections are irrevocable, so an increased election upon return from furlough would not be permitted.
Does a furlough qualify as a “Separation from Service”?
No, not in and of itself. A separation from service does not occur until an individual has been on a leave of absence for six months, but this rule applies only if the individual is expected to return following the leave. We believe in this situation that furloughed employees are expected to return to work, so you could rely on this rule and delay the separation from service event for six months. Once someone has been furloughed for six months, the rule is that they will experience a separation from service at such time unless they have a right to reemployment by statute or contract. Currently, there is no statutory right to reemployment of which we are aware that extends for a 6 month leave period. There could be contractual rights to reemployment, however, such as under an employment agreement or collective bargaining agreement; in that case, the separation from service would occur when their contractual right to reemployment expires.
If employees are put on reduced schedules, rather than completely furloughed, then a separation from service will occur if there is a reasonably anticipated permanent reduction in the level of services performed by the employee to less than 50 percent of the average level of services performed by the employee during the immediately preceding 36-month period.
Future Guidance
We expect to see IRS guidance in the coming days or weeks. The articles here and here by the American Retirement Association (the parent group for ASPPA and the Plan Sponsor Council of America and other similar associations) outline some of the relief that is being requested from Congress. Foley’s employee benefits and executive compensation team will continue to monitor changes and update clients as necessary.
For more information about recommended steps, please contact your Foley relationship partner or one of the attorneys below. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.
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