Skip to Main Content
Facebook Visit us on LinkedIn Visit us on Twitter Visit us on YouTube Visit us on Instagram

Comp and Benefits Brief

Download PDF

March 20, 2020

COVID-19 Employee Leaves, Layoffs and Reductions in Hours

Benefits Considerations

In response to the COVID-19 national emergency, employers of all sizes are in the process of implementing voluntary and involuntary leaves of absence/furloughs, layoffs and/or reduction in hours programs. The implementation of these types of programs invariably raise employee benefits issues that involve health and welfare, 401(k) and pension plans. This alert identifies some of the key benefits issues that you should consider.[1]

Health and Welfare Plans

If you impose a mandatory leave (whether paid or unpaid) or reduced hours:

  • Determine whether the affected employees remain covered under each health and welfare benefit during the leave. Check benefit plans, summary plan descriptions (SPDs) and group insurance policies to determine if leaves are specifically addressed. Paid leave may be treated differently than unpaid leave and FMLA leave may be treated differently than non-FMLA-leave.
    • Does coverage continue if the employee is not actively employed?  Check each type of benefit offered, not just group medical coverage (e.g., short-term disability, long-term disability, life and AD&D insurance).
    • Is a “leave of absence” directly addressed in the plan or policy?  How is “leave of absence” defined? 
    • How will employee premiums be paid during the leave for continuing coverage? Is any reduced pay enough to cover the premiums?
    • If leave is for an extended period of time, when will coverage end?
    • Consider state mandated leave requirements in addition to federal requirements.
    • Consider how to handle union employees and their benefits under collective-bargaining agreements.
  • Determine whether employees remain eligible for benefit plan coverage.
    • For example, if the plan provides benefits for those employees who regularly work 30+ hours, then does the employee have coverage if paid hours drop below 30?
    • If subject to the ACA, consider how this will impact variable hour employees’ status.  If you use a monthly measurement period for determining “full-time employee” status for ACA purposes, a leave of absence may trigger loss of coverage. Consider the implications of failure to meet the ACA employer responsibility rules for minimum coverage.
  • Consider what happens if an employee contracts COVID-19 or otherwise becomes sick or disabled during the mandatory leave.
    • Will the employee qualify for short-term disability under your policy or plan?
    • What will be the wage rate used?
  • Consider whether a family status change is triggered with respect to medical and dependent care FSAs.

If you lay off employees:

  • Will COBRA coverage be offered at that point? Or will you provide extended group health coverage for a period of time?
    • If offering extended coverage, make sure your decision is reflected in amendments to your group insurance policy or plan document and your SPD.  If you are self-insured, any extended coverage needs to be approved by your stop-loss insurer.
  • Consider WARN Act implications for benefits continuation (plus applicable state mini-WARN laws).
  • Consider whether a family status change is triggered with respect to medical and dependent care FSAs.
  • Will the states in which affected employees are located allow filings for unemployment insurance benefits?

401(k) Plans

If you impose a mandatory leave (whether paid or unpaid) or reduced hours:

  • Consider if you can suspend loan repayments (note that suspension is not permitted if the employee is still receiving some pay)
  • Consider expanding the number of permitted loans
  • Consider whether hardship withdrawals are available for affected participants
  • Check how you will credit service for time of leave and possible needed amendments

If you lay off employees:

  • Consider how the termination will impact outstanding plan loans.
    • Should you consider amending your plan to delay a default and/or allow manual repayments?
  • Consider whether hardship withdrawals are available for affected participants.

Defined Benefit Plans

If you impose a mandatory leave (whether paid or unpaid) or reduced hours:

  • Consider service crediting rules and final average pay rules for period of absence and consider possible amendments.

If you lay off employees:

  • Consider whether a layoff will trigger a termination of employment for distribution purposes (e.g., early retirement eligibility).
  • Consider any suspension of benefits provisions that will be triggered upon rehire.

Employers should coordinate with their insurers, third-party administrators and legal counsel to ensure a collective understanding of what benefits coverage will be available for employees.  Amendments to plan documents and SPDS, as well as to group policies, may need to be prepared. Most importantly, communications to employees should be crafted with the above considerations in mind.  In this stressful time, being armed with knowledge about how employee benefits will be handled will go a long way to calming the waters when a leave, furlough, layoff, reduction in hours or other program is announced by an employer.

The Employee Benefits and Executive Compensation team is ready to assist with questions or compliance steps. Please contact one of our Executive Compensation and Employee Benefits attorneys or the Nelson Mullins attorney with whom you work.

[1] This Alert does not address emergency FMLA or emergency sick leave mandated to be provided by certain employers under the Families First Coronavirus Response Act, signed into law by President Trump on March 18, 2020.