During periods of economic or business uncertainty, employers may need to downsize their workforce. Such reductions can take a variety of forms but frequently include employee layoffs or furloughs. Employers who take these measures must ensure they are in compliance with laws governing compensation and employee benefits. The following sections outline federal requirements related to benefits. As such, employers may also consider reviewing state and local laws for additional legal requirements when terminating or suspending employment.

Health Plan Coverage
Employers may continue active health plan coverage for furloughed employees, depending on their health plan’s eligibility rules. For example, a health plan may require employees to work a minimum number of hours to be eligible for coverage and include rules for how to account for short-term leaves of absence, whether paid or unpaid. Employers should review the terms of their written plan documentation to determine the eligibility rules that apply to furloughed employees. Special coverage requirements apply to applicable large employers (ALEs) under the Affordable Care Act’s (ACA) employer shared responsibility rules. In general, active health plan coverage for laid-off employees should be terminated, as they are no longer considered employees, although they may be eligible for continuation coverage.

Employers who want to expand eligibility for furloughed employees may have the option of amending their health plan’s written terms to do so. However, employers should check with their insurance carriers, including a stop-loss insurance carrier, before expanding their health plan’s eligibility rules. Employers who expand coverage outside the terms and conditions of the plan without consent from the insurer may face significant financial exposure.

In addition, during a furlough, employers may choose to pay the employees’ share of premiums in full or in part. Employers who pay for employee premiums will need to comply with any applicable cafeteria plan rules and nondiscrimination requirements to ensure favorable tax treatment.

Employer Shared Responsibility Rules
As previously mentioned, the ACA requires ALEs to offer affordable, minimum-value health coverage to their full-time employees (and dependents) or potentially pay a penalty to the IRS. ALEs are employers who averaged at least 50 full-time employees, including full-time equivalent employees, during the preceding calendar year.

Terminating group health coverage for a full-time employee during a furlough may trigger an employer shared responsibility penalty for an ALE if the employee is still considered to be employed by the employer. This is more likely to be an issue for ALEs that use the lookback measurement method to determine full-time employee status. Under the look-back measurement method, individuals determined to be full-time employees for a stability period must generally be offered coverage for the entire stability period as long as they remain employed. Upon layoff, an employee is no longer considered employed, so there is no obligation under the ACA’s employer shared responsibility rules for an ALE to continue active health coverage.

In addition, ALEs that maintain coverage during a furlough must ensure that the coverage remains affordable, as defined by the ACA, to avoid penalties. Depending on the circumstances, this may require an increased employer subsidy.

COBRA and State Continuation Coverage
If active health plan coverage terminates due to a furlough or layoff, employees may have the right to continue their coverage under federal or state continuation coverage laws. The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a federal law that requires covered group health plans to offer continuation coverage to employees, spouses and dependent children when their coverage would otherwise end due to certain specific events, called qualifying events. Both termination of employment and a reduction in hours of service that causes a loss of eligibility for coverage are considered COBRA-qualifying events that would entitle an employee (and any covered dependents) to elect up to 18 months of  COBRA continuation coverage. Employers should provide a COBRA election notice when employees lose coverage due to layoff or furlough.

Although COBRA only applies to health plans maintained by employers with 20 or more employees, most states have their own continuation coverage laws that apply to insured group health plans of smaller employers. If state continuation coverage rights apply, employers should ensure the required notices are provided to furloughed or laid-off employees.

Group health plans can require qualified beneficiaries to pay for COBRA continuation coverage, although employers can choose to provide continuation coverage at reduced or no cost. In general, the maximum amount charged to qualified beneficiaries cannot exceed 102% of the cost of the plan for similarly situated individuals covered under the plan who have not incurred a qualifying event.

Unemployment Compensation
Employers that continue health coverage for laid-off or furloughed employees do not automatically jeopardize their employees’ eligibility for unemployment benefits. In many cases, such employees (including employees who are working reduced hours, typically a reduction of more than 50%) are eligible for unemployment benefits. Eligibility for unemployment benefits is generally determined by state unemployment insurance programs rather than federal law. Therefore, employees are encouraged to contact their state’s unemployment insurance program for questions regarding eligibility and benefits.

Resources
• U.S. Department of Labor (DOL) unemployment insurance guidance
• WARN Act employer guide
• DOL FAQs on COBRA continuation coverage
• IRS guidance on the ACA’s employer shared responsibility rules

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