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| Adam Cohen |
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| Meredith O’Leary |
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| Michael Hepburn |
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| Laura Taylor |
Part two covers employee benefits issues that may be impacted, including mid-year changes to cafeteria plan elections, Affordable Care Act implications and retirement plan considerations.
Mid-Year Election Changes
Many employers sponsor cafeteria plans that provide arrangements for employees to make pretax payments of medical premiums and pretax contributions to health and dependent care flexible spending accounts.
Under Section 125 of the Internal Revenue Code, participants in a cafeteria plan must make their cafeteria plan elections prior to the beginning of the plan year. Those elections are required to remain in place throughout the year, unless a change is permitted under both the applicable regulations and the plan documents based on the occurrence of certain events.
Change in Employment Status
Employees impacted by COVID-19-related employment changes may be able to make changes to cafeteria plan elections under the change in employment status rules. A change in employment status includes a termination or commencement of employment, a commencement of or return from an unpaid leave of absence, or a change in worksite.
Note that a change in worksite would need to impact the employee's eligibility for coverage in order to make a change — an employee who has been working from home full-time who returns to the office may not have an election change right with respect to most covered benefits. However, employees who were on unpaid leave will likely be able to make a mid-year election change when they return to paid work, and employees returning from working from home may be able to make a mid-year election with respect to dependent care due to their changing child care needs, as discussed below.
In determining whether an employee can make an election change due to a change in employment status, employers should be aware of the IRS guidance with respect to terminations and rehires within a 30-day period, which is in place to prevent employers from briefly terminating and then rehiring an employee in order to work around the annual election rule. The cafeteria plan regulations include an example of an employee briefly terminating employment in order to make a mid-year election change, and state that this is not a permissible event.
The IRS has also indicated informally that a similar 30-day rule would apply to returns from unpaid leaves of absence. While it's possible that the IRS would view COVID-19 rehires and returns from unpaid leave that occur within a 30-day period as permissible events that would allow for an election change, many cafeteria plans are drafted to prevent changes in elections if there is a rehire/return within 30 days. Employers should consult their plan documents and discuss with their benefits counsel if they have any rehires who were out less than 30 days and who would like to change their elections when they return to work.
Dependent Care FSAs: Changes in Child Care Providers and Costs of Coverage
As mentioned above, employees may need to make changes to dependent care flexible spending accounts, or FSAs, as a result of changing child care needs upon a return to work.
The cafeteria plan regulations allow employees to change dependent care FSA elections as a result of a change in child care providers, and there may be other circumstances that would allow employees to make changes to dependent care elections, such as a significant change in the cost of coverage. Note that the election change rules for health FSAs are often more restrictive — for example, employees cannot make changes to their health FSAs if there's a significant change in cost of coverage.
Limited Time Period to Make Changes
Most plans have a requirement that limits the ability of employees to make elections to within 30 days of an election event. Employers should review their cafeteria plan and make sure that employees are aware of any time limits to make permitted election changes.
Affordable Care Act Implications of Return to Work
Most employers are experienced in dealing with the Patient Protection and Affordable Care Act 10 years after its enactment, but the COVID-19 pandemic may present the first time when some employers are dealing with the ACA rules on fluctuating workweeks and breaks in service on a large-scale basis. Employers with 50 or more full-time equivalent employees are required to offer medical coverage to their employees working at least 30 hours per week. For any large employer that does not offer coverage to employees working less than 30 hours per week, it is important for the employer to properly calculate hours.
The ACA provides options for employers in determining whether an employee is full time for ACA purposes. Once an employee is measured to be full time, employees must generally be offered medical coverage for the length of the subsequent stability period (generally, 12 months), even if work hours drop below 30 hours per week.
ACA Break-In-Service Rules
The break-in-service rules provide an exception to the stability period requirements. A break in service occurs when an employee works 0 hours for 13 weeks (26 weeks for certain educational institutions), and employees incurring a break can be subject to a waiting period or retested for eligibility following a rehire.
Note that there is a rule of parity that applies to employees who have been employed for less than the break-in-service period. Employers whose employees have been in a 0-hour state for an extended period of time will need to look at whether these employees have incurred a break in service and need to enter a new measurement period and be treated as a rehire.
ACA Affordability Implications
Employers will want to consider whether fluctuating work periods or changes to employee compensation impact the affordability standards for impacted employees. Individuals who may have terminated employment during a stay-at-home order may have been subsidy-eligible in obtaining coverage on an exchange and returns to employment may raise penalty risks.
The ACA regulations provide certain limits on an employer's ability to rely on some of the affordability safe harbors — for example, the rate-of-pay safe harbor cannot be used for salaried employees whose pay was reduced during the year. As discussed below, employers who rely on the W-2 safe harbor will want to consider whether any reduced compensation will cause the medical coverage to be deemed unaffordable.
Retirement Plans
Retirement Plan Eligibility
Employers should review their retirement plan's eligibility and vesting requirements to determine the impacts of any furloughs, terminations and rehires, or returns from unpaid leave on plan participants. To the extent that employees are being treated as terminated and newly hired, employees may need to be automatically enrolled, and make new beneficiary designations and new investment choices.
Employees who were not being paid but are treated as continuing employees (e.g., employees on furlough) may be able to simply step back into their previous choices. To the extent that an employer has a soft-frozen defined benefit pension plan that excludes new hires and rehires, determining whether an individual is a rehire or a continuing employee can make a significant difference in the employee's future retirement benefits.
CARES Act
The Coronavirus Aid, Relief and Economic Security, or CARES, Act provided employer-sponsored retirement plans with the ability to suspend loan repayments in 2020 and allow participants to take early withdrawals without the 10% federal tax penalty. Individuals returning to work may still be eligible for these benefits. The CARES Act penalty-free early distribution rules apply to coronavirus-related distributions that occur through the end of 2020 and are not directly tied to employment status.
The CARES Act loan repayment delay also lasts through the end of 2020 for those taking advantage of it. Outside of any CARES Act deferrals, however, employees whose loan repayments were suspended while they were on unpaid leave or on furlough should restart their loan repayments when they return to work.
Documentation and Recent DOL Guidance
While employees were not in the office, retirement plan sponsors may not have been able to fully comply with various administrative and documentation requirements of the Employee Retirement Income Security Act and the tax code. For example, required notifications may have been delivered by email even though the employer normally delivers documents in hard copy because all of the requirements for electronic delivery are not satisfied.
Remote notarization may have been utilized for spousal consent despite the general physical presence requirement. The U.S. Department of Labor provided recent guidance in Employee Benefits Security Administration Disaster Relief Notice 2020-01 stating they would not treat failures to follow procedural requirements for plan loans and distributions as failures provided that (1) the failure was solely due to the COVID-19 outbreak; (2) the plan made a good-faith diligent effort to comply with the requirements; and (3) the plan administrator makes a reasonable attempt to correct any procedural deficiencies as soon as administratively practicable.
As employees return to work, employers should start addressing any documentation issues to ensure compliance with legal requirements and to comply with the Employee Benefits Security Administration notice.
A couple of additional items that employers should consider for their retirement plans include:
- For any employees who have been terminated and who do not return to work, review the plan's distribution requirements and ensure that force-outs are made in compliance with the plan's terms.
- To the extent that any matching or other employer contributions were suspended during the stay-at-home orders, employers may wish to reinstate these contributions.
W-2 Compensation Considerations for Employees With Fluctuating Pay and Schedules
Many employee plans rely on annual compensation in determining benefits. For example, group-term life insurance benefits may be based on an employee's prior year W-2 pay. As a result of pay fluctuations during the stay-at-home orders, employers may wish to annualize employee compensation based on the length of time the employee was employed in 2020.
Some employee bonuses are also based on a percentage of compensation, and employers will want to examine whether to pay such bonuses based on an employee's actual compensation for the year or annualize their compensation based on a full 12 month work period. Finally, employers who use the W-2 safe harbor to calculate affordability under the ACA should confirm that any employee pay changes during the stay-at-home orders will not cause the employer-sponsored medical coverage to be deemed unaffordable.
Ongoing Compliance
Plan changes that were made as a result of the CARES Act, the Families First Coronavirus Response Act, or any other changes may require a plan amendment, updates to summary plan descriptions and summaries of benefits and coverage, and other plan communications. Employers should review these documents and make sure they are up to date and provided to employees in accordance with legal regulations.
While the CARES Act allows certain retirement plan amendments relating to the loans and early withdrawal provisions to be made on or before the last day of the first plan year beginning on or after Jan. 1, 2022, employers may want to make these changes as soon as possible in order to keep the plan documents accurate and up to date.
It is possible that employees will return to work with questions about their benefits — particularly those who have needed to take advantage of CARES Act and Families First Coronavirus Response Act changes — and employers will need to make sure that the documents and communications provided to employees reflect each plan's terms.
Employers should continue to monitor changing laws and regulations. The IRS and DOL may provide additional guidance on a variety of issues in the coming months as the COVID-19 pandemic continues to influence regulations and government actions.
Adam Cohen, Meredith O'Leary and Michael Hepburn are partners, and Laura Taylor is an associate, at Eversheds Sutherland.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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