INSIGHT: How Employers Can Help Employees Now

Countless employers have been forced to reduce employees’ hours or terminate employees due to the Covid-19 crisis.

Beyond table stakes considerations such as paid leave requirements, “stay” agreements and severance pay programs, employers have other available actions to cushion the fall for their workforces during these unprecedented times.

Subsidize COBRA or Provide COBRA Allowances

An employer must offer COBRA (or the state law equivalent if a small employer) to an employee who loses group health plan coverage due to a reduction in hours or a termination of employment. Qualified beneficiaries typically are required to pay the full COBRA premium.

However, an employer can subsidize the COBRA premium cost in order to ensure continued coverage is affordable. For terminated employees, a COBRA allowance can serve as consideration for a release agreement.

For furloughed employees, an agreement can be structured as a loan or payroll advance (or promissory note in jurisdictions prohibiting payroll advances) to be forgiven at future date, thereby incenting employees retention through the downturn.

Allow Group Plan Health Coverage for Furloughed, Part-Time Employees

Many group health plans impose a “full-time” employment eligibility requirement. This is typically defined as working 30 hours or more per week consistent with the Affordable Care Act’s definition of a full-time employee.

If a plan is amended to provide coverage to employees who are scheduled to work less than full-time, it allows continued coverage for an employee with reduced hours without the need to offer COBRA. On this point, employers should be aware of state-specific guidance changing these requirements during the COVID-19 crisis.

Amend Dependent Care Spending Accounts to Add Spend-Down Provision and Grace Period

A spend-down provision allows a terminated employee to use remaining Dependent Care Assistance Plan (DCAP) funds for eligible expenses incurred through the end of the plan year in which the employee was terminated.

A grace period provision permits employees to carry over unused DCAP contributions from one year to the next for up to two months and 15 days following the close of the plan year. In this way, participants do not lose amounts already saved to the DCAP that they may be unable to use in 2020 while schools and daycare facilities are closed.

Amend Retirement Plans to Allow Multiple Loans and/or Suspend Repayments

A profit-sharing plan (PSP), 401(k) plan or 403(b) plan can be amended to permit one or more plan loans to participants. Current law generally limits plan loans to the lesser of $50,000 or 50% of the participant’s vested account balance.

The CARES Act increased the maximum loan amount for loans taken by Sept. 23 to the lesser of $100,000 or the vested account balance. In addition, the plan can be amended to suspend loan repayments during an unpaid leave of or a paid leave of absence when the participant’s after-tax rate of pay is less than the loan’s required installment payment. The CARES Act allows any loan repayments due on or before Dec. 31, 2020, to be delayed for one year.

Amend Retirement Plans to Add/Expand Distribution Provisions and Fully Vest Accounts

A PSP or 401(k) plan may be amended to allow for several permissible in-service distributions, including among others, distributions following a stated event, such as a furlough, or layoff.

Ordinarily such a distribution before age 59½ would be subject to the 10% early distribution excise tax. However, the CARES Act waives the 10% penalty for distributions up to $100,000 for Covid-19 related purposes made on or after Jan. 1.

In addition, a 401(k) plan or 403(b) plan can be amended to allow distributions during the Covid-19 crisis that meet one or more safe harbor hardship events including, among others, expenses for medical care for a participant or a participant’s family, payments necessary to prevent a participant’s eviction from, or mortgage foreclosure on, a principal residence, and a participant’s expenses and losses incurred on account of a disaster declared by FEMA.

The 10% early withdrawal penalty is also waived for these distributions if they are related to Covid-19.

When combined with a permissible distribution, fully vesting participants’ accounts in a qualified retirement plan allows participants to access more money without a penalty.

Amend Retirement Plans to Revise the Method for Counting Hours of Service

A qualified retirement plan can be amended to switch from crediting hours using a counting hours method to an elapsed time method. Doing so allows employees with reduced hours from losing accruals and vesting under the plan.

Establish a Qualified Disaster Relief Payment Program Under Code §139

A qualified disaster relief program permits an employer to make payments to an employee for reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster.

These payments are excluded from an employee’s gross income and from wages and compensation for purposes of employment taxes. An employer should keep appropriate records in order to document its corporate tax deduction.

Submit Short-Time Compensation Program Plan to the State Workforce Agency

Short-Time Compensation (STC) programs are an alternative to layoffs. STC permits employers to decrease work hours for some employees while other employees continue to work regular, full-time, hours. Employees who have their hours reduced by at least 10%, but not more than 60%, are permitted to collect a pro-rated portion of the unemployment compensation payment they would have received if fully unemployed .

An employer must have an approved short-time compensation plan in place with its state workforce agency. The employer pays a portion of the employee’s wages to the employee plus half the amount of the benefit paid by the state under the STC plan. Under the CARES Act, the federal government will temporarily reimburse the state the full amount of the remaining half of the STC plan benefit. Currently, 26 states have operational STC programs and the CARES Act encourages additional states to offer these programs.

Employers seeking to establish an STC plan or to implement one or more of the employee benefit program actions detailed above should contact qualified employment and benefits counsel for assistance.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners

Author Information

Christopher Humes, an associate at Brownstein Hyatt Farber Schreck, is a litigator focused on ERISA governance and pursues employers that do not pay required employee benefit contributions. He also ensures that multiemployer trust funds comply with federal guidance for benefits and health care plans.

Cara Sterling, a shareholder at Brownstein Hyatt Farber Schreck, counsels single-employer, multi-employer and governmental funds as well as qualified health plan issuers on ERISA and federal tax compliance. She devotes a significant portion of her practice to the impact of the Affordable Care Act on the design, implementation and administration of health and welfare plans.

Allison Gambill, of counsel at Brownstein Hyatt Farber Schreck, defends companies in both employment and commercial matters, and is valued for her practical approach to disputes as well as for her experience representing a wide variety of regulated industry clients in federal, state, and administrative courts.