Health Benefits Implications of Reduction of Hours, Furloughs, and Layoffs Created by Coronavirus Pandemic
May 11, 2020: The IRS clarified use of health plan expenses in relation to the employee retention credit.
In response to the COVID-19 pandemic, many businesses have had to make challenging decisions when it comes to retaining their employees. It has necessitated evaluation of staffing needs after states issued various orders aimed at curbing the spread of the coronavirus. Some orders impacted normal business operations, such as requiring non-essential workers to stay at home, closing non-essential businesses and limiting how they operate. In some instances, these decisions have resulted in businesses reducing employee hours or furloughing/laying-off employees.
A potential unintended consequence of reducing working hours or furloughing employees:
- Individuals may no longer be eligible to stay on their employer’s health plan
- If they are permitted to stay on the plan, the cost may be higher
Employee health plan eligibility
The plan document for health coverage often includes average hours of service or active employee status eligibility requirements to determine coverage offered and employee cost. In certain circumstances, employees may remain on their employer health plan through COBRA, but it is most likely cost-prohibitive given employees would have to pay the entire premium while working fewer or no hours.
Businesses who want to help their employees stay on their health plan at the same rate are encouraged to contact their carriers, understand eligibility requirements, and if necessary, request flexibility. Many carriers have been working with employers to ease eligibility requirements during the emergency, provided employers continue to pay premiums.
In addition, states have a public interest in helping individuals stay on their employer’s health plans. Several states – Alabama, Massachusetts, New Jersey (for large employers with 51 or more employees), Washington, and Wisconsin – have issued bulletins specifically requesting that insurers be flexible with eligibility requirements. A few states – Maine, New Hampshire, New Jersey (for small employers) and Ohio – have made this a directive. The IRS clarified that employers who qualify for the retention credit may utilize the health plan expenses as qualified wages even if there are no or reduced hours/wages. This may lessen some of the financial burden on employers who qualify for this credit if they choose or are required to continue health benefits.
Potential financial impact on applicable large employer
Applicable Large Employers (ALEs) may face potential financial consequences under the Affordable Care Act’s Employer Shared Responsibility (ESR) provisions, if some employees currently working reduced hours or furloughed employees are no longer eligible for a health plan.
What happens when ALEs reduce hours during the COVID-19 pandemic?
In general, ALEs must offer adequate and affordable health insurance coverage to full-time employees (and their dependents) or risk the IRS potentially assessing a penalty under Internal Revenue Code Section 4980H if a full-time employee receives a premium tax credit. An employee’s full-time status is often determined under the Look-Back Method during a timeframe known as the stability period. Keep in mind, that it does not matter if the employee is not actually working full-time hours after having hours reduced or being furloughed. The look-back period generally has already occurred and the employee’s status as full-time is locked in. Even though an ALE’s offer of COBRA coverage can be considered an offer of coverage for ESR purposes, the ALE may be subject to a Section 4980H penalty because it is less likely that the offer will meet affordability requirements.
Potential assessments can be significant. Given the flexibility during the COVID-19 emergency that may be afforded, ALEs may want to contact their carriers to request that their reduced hour and/or furloughed employees are able to maintain coverage under their health plan at the same rate the employee had prior to the change in status.
Employees returning to work after being furloughed or laid-off
As state governors evaluate easing restrictions, businesses may consider rehiring laid-off employees or returning furloughed employees to their previously held positions. This factors in whether they would benefit from financial incentives offered by the federal government to retain employees, such as through the Paycheck Protection Program (PPP) or the Employee Retention Credit offered in the CARES Act. The passage of the PPP Flexibility Act on June 5, 2020, extends the time a borrower can qualify for the FTE and Salary/Hourly Wage reduction safe harbors,
ALEs should be aware of the special rules that apply in determining if employees are considered continuing employees (rehired for ESR purposes) or new hires after a break in service. In general, a break in service is a period where an employee has no credited hours of service. ALEs risk a 4980H assessment if they do not offer adequate and affordable coverage immediately to rehired employees who were full-time prior to the break in service and if the employer is in the same stability period.
In contrast, ALEs generally have more time to offer coverage to those considered newly hired employees who are full-time under ESR provisions. For example, ALEs don’t have to offer coverage to new hires reasonably expected to be full-time at the start date; they have until the first day of the fourth full month before they are at risk for a 4980H assessment.
How ALEs determine New Hire or Rehire for 4980H?
An individual is considered a new hire if one resumes providing services to an ALE after not being credited with an hour of service for at least 13 consecutive weeks (26 consecutive weeks if the employer is an educational organization). An individual who resumes providing service after a lesser period is a rehired employee for ESR purposes.
Alternatively, if an employer wishes to consider the employee a new hire for the purpose of ESR sooner than the 13 weeks (26 for educational organization), they may use the rule of parity. Under this rule, an individual may be treated as a new hire even if the break in service is for a lesser period and if certain conditions are satisfied. Under the Rule of Parity, an ALE may treat an employee as a new hire if:
- The break in service was four (4) consecutive weeks or more
- The break in service period exceeds the number of weeks of employment with the ALE immediately preceding the break in service
ALEs wanting to rehire furloughed or laid-off employees should factor these rehire rules in their planning to avoid the risk of incurring a Section 4980H assessment.
Navigating business challenges created by the coronavirus requires employers to make determinations on how they wish to support their employee’s healthcare needs, which have a heightened importance in this global pandemic. This may entail evaluating what flexibility their geographies and carriers either afford or require, when it comes to expanding the employee population that can avail themselves of affordable employer-sponsored health coverage.
In this evaluation, ALEs must factor in the dynamic of whether these employees could subject them to a risk of a costly 4980H assessment. This is a delicate needle to thread; balancing the financial cost of health coverage for employers that may have already taken a significant financial hit from the crisis with the health coverage needs of their employee population (both active and inactive), while adding in the state and federal rules that add a layer of complexity to this decision.
Paychex understands the layers of complexity created by the COVID-19 pandemic and the subsequent legislation being passed to address it. If you want your focus to remain solely on keeping your business open, re-opening it, or getting your employees back to work, know that we can help. We have the expertise with ESR to help assist with filing the necessary forms on deadline, the know-how to evaluate your penalty risk for coverage offers under ESR requirements, and much more.