By Rayan Omer
The pandemic is continuing to impact small business owners negatively. People are fearful to go back to normal routine pre-COVID-19 and risk catching the virus. Businesses that are not necessary are considered a luxury. For example, activities like going to get your nails done or getting a massage are no longer on many people's minds because of this fear risk. Thus, the financial strain on employers with those kinds of leisure businesses is disastrous, to say the least.
In different states, branches of big companies have closed some of their shops for good, like Victoria’s Secret and See's Candies. I can't even imagine what's happening to boutique shops in little towns with smaller resources.
These problematic situations led employers to reduce employees' payroll by furloughing or reducing workers' hours to survive in the current recession. But small business owners need to be careful of the effect of such changes on employees' benefits. Hence, there are some legal implications to look out to. A few examples of employee’s benefits and employer’s liabilities are discussed below.
Healthcare and Welfare Plans
Employers might be confused as to what happens to the health care coverage of a furloughed worker. What governs is the terms on the health insurance plan that determine the extent of the coverage. For instance, the majority of small business owners offer health insurance only to full-time employees. Thus, a reduction in an employee’s hours might not affect the health plan coverage if the employee’s hours are sufficient to extend the health coverage.
Usually, all health plans define how many hours a worker needs to be active in service to qualify for coverage and how long they can be absent from work before losing their eligibility. To illustrate the eligibility requirements, for example, a health care plan might require an employee to work 30 hours a week to qualify for health coverage. In the event a worker has been active in service less than the minimum required 30 hours for four consecutive weeks, they lose eligibility.
Generally, employees are eligible for coverage when they satisfy eligibility by working the required minimum number of hours per week during the waiting period. However, whether the employee receives credit for the furlough of the waiting period depends, as I mentioned above, on the terms of the employer’s plan document.
The Health Insurance Portability and Accountability Act (“HIPAA”) protects participants and beneficiaries in group health plans. For example, the HIPAA nondiscrimination rule states that employers cannot “refuse to provide benefits because an individual is not actively at work on the day that individual would become eligible for benefits.” If the actively-at-work clause denies entry into the plan because the worker is not actively at work due to a health factor on the day they would otherwise enter the plan, the clause is void under “HIPAA”.
Additionally, putting in mind the duration of a furlough, owners need to consider how a 2020 furlough would affect full-time employee’s health coverage for the 2021 year.
Small business owners should be aware of the Employers’ Mandate, as it applies to employers with 50 or more full-time employees or full-time equivalents (“FTEs”). The mandate requires employers to offer affordable health insurance that provides minimum value to 95% of their full-time employees and their children.
According to CIGNA, the IRS safe harbors have defined affordable insurance only if the cost of self-only coverage is less than the indexed percentage of the employee’s W-2 wages, employees’ monthly pay, or lastly, the federal poverty level of an individual. Additionally, a plan provides minimum value if it provides payment for at least 60% of the costs of the services costs.
ACA Employer’s Penalty
The significance of providing healthcare plan coverage to the right employees is essential to your business; hence, for example, if employers furloughed employees on a large scale that caused the loss of a group health care coverage, this group loss of health coverage might trigger the COBRA notice. COBRA stands for the “Consolidated Omnibus Budget Reconciliation Act.” According to the Department of Labor (“DOL”), COBRA provides the workers and their families who lost their health benefits to choose whether to continue or not with the health benefits offered by their group health plan for a limited period of time.
In the event an employer does not provide a COBRA notice when it’s required, ACA penalties may apply. For instance, if the health coverage is not available to 95% of the full-time employees, this is a trigger to a COBRA notice. The lack thereof of the notification might subject the employer to the ACA penalties. That’s why it’s essential before any significant furloughs, to determine whether it would terminate a group health plan.
According to SHRM, keeping ineligible workers, who do not meet the minimum requirement for qualification to the health plan coverage in your plan, poses liabilities. For example, there is a risk of a potential loss of the plan's tax-exempt status, which may cause both the employer and employees to owe back taxes. Moreover, the insurance company may deny claims for those not eligible to participate in the plan. Also, there is a possible fiduciary breach under the Employee Retirement Income Security Act (“ERISA”) when plan assets are paid for the benefits of ineligible individuals. For more information about the ACA penalties, please refer to Ballard Spahr LLP.
Payment of Premiums and Contributions
Health care premiums are not cheap. Covid-19 has made things only worse to employers and employees. If a furloughed worker cannot afford to pay his monthly contributions to maintain the plan coverage, this failure would result in the termination of the health care coverage. Thus, the employer needs to figure out a way with his staff before taking any furloughing action to ensure payment of these premiums.
Small business owners understand the struggle nowadays with the Coronavirus to keep up with the healthcare plan's monthly payments while being on a lower salary or furloughed. Hence, some companies have considered plan premium tiers that determine employee's health contributions based on their pay level, according to SHRM. This type of plan allows lower-paid co-workers to have subsidized coverage because higher-paid employees are helping out.
The 401(k) retirement plan depends on the amount the employees are paid. Generally, workers’ contributions to the 401(k) are matched by their employers. But if a staff member is furloughed and is not paid during this period, they may not be able to contribute to the retirement plan, nor have their business owners match their contribution. Thus, this sad scenario created by the COVID-19 financial crisis would lead to the 401(k) ceasing effect. Additionally, when an employee is furloughed, they are not in service. To be eligible for the retirement plan, workers need to work certain hours in a year for their qualifications. That's why a small business owner needs to address these issues or bear them in mind before taking any furloughing action towards their employees or reducing their working hours. As mentioned above, these considerations affect the employees’ benefits, which can affect the business overall.
The pandemic has impacted businesses negatively, which led employers to either furlough, reduce hours, or let go of their employees. Small business owners need to revisit those employment agreements to make sure that they are complying with the contracts. Some contracts do not have any flexibility or room for alteration. For example, how does a pandemic furlough affect the compensation or employment status? That’s why it’s essential to review your workers contract agreement before making any major decisions that are considered a breach of contract.
The pandemic could be considered as an unforeseen circumstance, but it’s important to review employees contracts as I mentioned earlier.
Small business owners are struggling to navigate the business world amidst all the pandemic law changes ---from closing stores, operating online to managing the safety measures owed to the customers and staff. Adding to all that stress, the Coronavirus has also caused a financial strain. And let us not forget the mental health this virus had on employees, who might not be enthusiastic about returning to work.
Employers had to let go of some workers, furlough others or reduce their hours and pay. While some business owners tried to keep their employees by furloughing them, this might seem to be a good idea. Hence, once things are better, you can have them back. However, there are some considerations for owners to think about. A furloughed employee might lose his health care plan coverage depending on the plan terms. As mentioned earlier, some plans require workers to be in active service 30 hours a week before being eligible for health benefits. Thus, an employee who loses his health care benefits, might not be waiting for you to have them on board, when the business is back on its feet again.
Additionally, the effects of furlough affected the retirement plan as well (401(k)). If a worker is unable to pay his contributions, these retirement plans might cease.
The negative impact is not limited to employees only. For example, if a group health plan is lost without giving the employees the COBRA notice, this might trigger ACA penalties.
Moreover, having workers on the health plan coverage, who do not qualify, is also problematic to the business. Hence, this might be a breach of fiduciary duty.
If employees are unable to pay their premiums contributions, this would also cause the plan to cease. That’s why it’s essential for small business owners to think ahead with their staff members about the ways to keep the health plan going.
In light of COVID-19 pandemic, some states have encouraged insurance companies to allow employers who wish to change their eligibility plans to do so. Other states have included grace periods for premium payments. It’s important to check the Department of Insurance to get up-to- date information.
Lastly, business owners need to review the employment contracts of their employees. Some agreements provide flexibility to change the hours and pay. Other contracts do not. Thus, by making any major changes, this qualifies it to be a breach of contract. That’s why it’s vital to the business success to review those contracts before furloughing your employees.
It’s a hard time for everyone. Losing your job or being furloughed is one thing. But losing all the benefits that come with it is another. Employees are worried sick about not being able to pay the necessities -- from paying the rent, groceries, to losing their health plan coverage in a time that is needed the most. The virus is everywhere and is dangerous to our survival. Small business owners should be mindful of all the considerations that accompany a worker who just got furloughed.
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