Most businesses in this country (and the world, for that matter) remain hobbled as a result of the COVID-19 pandemic. (Amazon is the exception. Another notable exception is Peloton, the exercise bike maker, which is glowing in its 172% surge in total revenue, with gains in subscribers and demand for its fitness products.) But employees in several industries, including travel, hospitality and entertainment, remain uncertain about their futures.
Many struggling but optimistic employers have continued to offer medical, dental and other benefits to employees on “furlough.” Before the pandemic, furlough was a concept more familiar to European countries, with furlough provisions mandated by law, than to U.S. employers. We’ve now settled on the concept that the employer has not severed the employment relationship of an employee on furlough (still active in the HR system) but the employee is not actively working and is not being paid except for the value of the benefits that the employer continues to provide.
It’s important for employers again to check their benefit plans and insurance policies to determine for how long the employer may extend benefits eligibility even though the employee isn’t actively working. Many have clauses that limit such “extended” coverage to six months. Other plans/policies don’t address this concept specifically but carriers have allowed the coverage to remain in place so long as the employer pays the necessary premium. (Please get this in writing from the insurance carrier.) As the benefits department is delving into 2021 open enrollment, don’t forget about the last quarter of 2020 and its special circumstances for any furloughed group.
It’s also necessary to check the plan’s COBRA provisions. Normally, the reduction in hours worked would constitute a COBRA qualifying event but not if that event doesn’t also result in a loss of eligibility for coverage. For a furloughed employee who still has health coverage, their COBRA event presumably won’t occur until actual termination of employment, at which point presumably the (now) former employee will remain eligible for COBRA coverage for at least 18 more months, depending on plan terms, albeit without the employer subsidy. With appropriate plan provisions, an employer with employees on furlough now may take action before then to trigger COBRA earlier and thereby have at least some portion of the furlough period with the employer’s subsidy count toward the 18 months of required COBRA coverage.
Some employers may have laid off (terminated) employees but still have hopes of rehiring them before the end of 2020. Those employees likely withdrew their vested 401(k) plan account balances. The IRS has provided helpful guidance on the “partial termination” issue affecting 401(k) plans and other tax qualified retirement plans. Identifying the occurrence of a “partial termination,” which generally occurs upon an employer-initiated participant reduction of 20% or more, is important because affected participants will become 100% vested in the employee contributions on their behalf. The laid off employees might as a result be entitled to a greater vesting percentage of their account balances. The IRS announced that employees who were laid off during 2020 (not just furloughed, but laid off) won’t count to determine if the 20% threshold was reached if they are rehired before the end of the year. Employees on furlough, who haven’t actually terminated employment, presumably won’t factor into the partial termination determination.