The number of new coronavirus cases continues to grow, and employers can prepare their business operations and response plans by anticipating employee benefits issues that may arise.
This article is the second in a two-part series on important employee benefits issues employers should consider. In Part I, we focused on employer-provided health benefits. This time, we examine other compliance issues and potential benefit change considerations.
Vendor Performance Issues
Much has been written lately about whether a business can invoke force majeure clauses—state contract law doctrines of impossibility or frustration—to excuse itself from contract performance due to a potential Covid-19 pandemic. Contracts typically limit force majeure events to those that are unforeseeable and beyond either party’s control.
An employer should consider the following scenario: What if the vendor that provides or administers employee benefits for its employees invokes such a clause (or doctrine) to excuse its performance due to a Covid-19 epidemic or quarantine affecting its workforce? As employers rely on vendors for all types of benefits, the result could be catastrophic. And to the extent an affected benefit is governed by the Employee Retirement Income Security Act (ERISA), the potential liability could be exponential.
The China Council for the Promotion of International Trade began issuing force majeure certificates in February to bolster local companies’ basis for invoking such contractual clauses. U.S. employers might consider doing the opposite, i.e., issuing notices to employee benefits vendors stating that they consider the potential Covid-19 pandemic to be foreseeable and that vendors are expected to comply with their obligations under their contracts and in accordance with law, including, if applicable, ERISA.
Employers must remember that group health plans are “covered entities” subject to the Health Insurance Portability and Accountability Act’s Privacy Rule, which restricts the use and disclosure of an employee’s “protected health information.” As such, an employer cannot and should not request that its group health plan provide information regarding an employee’s illnesses or potential positive Covid-19 status.
While there are exceptions to the Privacy Rule, such as for the disclosure of PHI to a public health authority or to certain individuals involved in the employee’s care, these exceptions are limited and very specific. The Department of Health and Human Services issued a bulletin Feb. 3, reminding covered entities of the requirements of the Privacy Rule’s exceptions in light of Covid-19; however, an employer should consult an employee benefits attorney with specific questions about compliance.
Paid Leave Considerations
Employers should consider whether Covid-19 meets the criteria under their short-term disability policies and the effects of a potential pandemic on paid leave policies in general. For STD programs governed by ERISA, such as insured disability policies, a change in eligibility criteria requires a formal amendment and disclosure to participants.
Coordination with a policy’s insurer or third-party administrator is also required. However, most salary continuation programs are not subject to ERISA and therefore do not require formal amendment or participant communications.
We are aware of employers considering whether to waive the elimination period for employees diagnosed with or being tested for potential Covid-19 to encourage them to remain at home. (An elimination period is a predetermined period that must expire prior to an employee becoming eligible to receive benefit payments.) Elimination periods can discourage employees from taking advantage of STD or salary continuation programs if the length of an employee’s absence cannot be anticipated.
If an employer chooses to waive the elimination period for individuals affected by Covid-19, it could require the employee to authorize his or her health-care provider to disclose the diagnosis or proof of testing to the employer for benefit payments to commence as of the first day of absence.
However, employers must be mindful of applicable state paid sick leave laws that may restrict them from soliciting health information from employees or requiring documentation from a health-care provider before an employee is absent for more than a certain period. State leave laws also may prohibit an employer from requiring employees to take paid sick leave.
401(k) Plan Considerations
An employer may wish to consult employee benefits counsel to determine whether an employee who has contracted Covid-19 or who is subject to quarantine could qualify for a hardship distribution under its 401(k) plan.
Many plans limit hardship distributions to those approved under the IRS hardship withdrawal “safe harbor,” which includes medical expenses for the employee and his or her dependents but does not include living expenses should the employee be out of work for a long period of time due to preventive quarantine or workplace shutdown.
In this case, an individually designed plan could be amended to allow for a hardship withdrawal relating to these expenses. However, this likely will not be possible under a pre-approved plan unless the IRS issues specific guidance. Alternatively, a plan can permit eligible employees to take loans from their 401(k) plan accounts, which must be paid back to the plan with interest.
Finally, in light of Covid-19’s impact on market volatility, the investment performance of 401(k) accounts will likely be impacted. Employers should anticipate that participants may be inclined to review or change their investment options or deferral elections.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Julia Ann Love is a partner and lead’s Thompson Hine’s Employee Benefit and Executive Compensation practice. She has more than 25 years of experience providing proactive and practical advice to businesses on all aspects of employee benefits and executive compensation, including ERISA compliance, defined benefit and defined contribution retirement plans, health and welfare plans, executive employment agreements and non-qualified deferred compensation arrangements.
Kim Steefel is counsel in the firm’s Employee Benefits & Executive Compensation practice group. She focuses her practice on employee benefits, ERISA, executive compensation, qualified and non-qualified retirement plans, welfare and employment agreements, and related tax and securities law compliance and disclosure matters.
Erin Shick is an associate in the Employee Benefits & Executive Compensation group and provides advice and performs comprehensive plan audits to ensure compliance with ERISA and related statutes and regulations. She also assists with benefit plan design, with a focus on self-insured health plans.