Across the United States, employers are carefully considering how the COVID-19 pandemic is affecting their business. As we await further guidance and pronouncements from federal, state, and local officials, some employers are being forced to consider furloughs for some or all of their workforce. We can assist employers in strategizing on furlough decisions and crafting communications to affected employees.

In this alert, we highlight the key employee benefits issues that employers will need to address as part of a furlough.

Health and Welfare Plans

  • The implementation of an employee furlough does not necessarily mean that health coverage under an employer’s group health plan will terminate. The terms of the plan document will govern the extent to which health coverage continues. Employers with insured plans will need to consider the terms of their insurance contracts. Many employers offer health coverage to “full-time employees,” which is determined based on the number of hours worked in a prior period. A reduction in hours in connection with a furlough, which is not a termination of employment, may not result in a loss of health coverage.
  • A furlough is not a COBRA qualifying event, unless it results in a loss of group health coverage. If the furlough results in a loss of health coverage, the employer must issue COBRA notices and allow affected individuals to elect COBRA continuation coverage.
  • An employer may consider whether to change how it determines who is eligible for coverage under its group health plan. If it does so, it should be mindful that its determination of who is eligible could cease to align with the definition of “full-time employee” under the ACA, and could trigger ACA penalties for the employer. The ACA penalties could be significant, particularly if coverage is not made available to 95% of the full-time employees (as determined under the ACA).
  • Depending on how long the furlough lasts, employers may need to consider how a furlough in 2020 may affect the determination of full-time employee status for health coverage in the 2021 plan year.
  • If employees are not paid during a furlough, an employer will need to consider how to handle the employee portion of the premium or cost of health coverage, which is normally paid by payroll deduction, for the duration of the furlough. Employers could elect to reduce or waive the employee portion altogether, arrange to have employees pay the employee portion by check or other means outside of the payroll process, or allow employees to make up the employee portion after the furlough has concluded.
  • A furlough would not qualify as a mid-year event that would allow for changes in coverage under the cafeteria plan rules, unless it affects eligibility for coverage, or unless an employee enrolls in another group health plan or certain other coverage, such as Medicaid or CHIP.
  • To the extent that an employer offers a dependent care flexible spending account (DFSA), shutdowns in schools and other child-care facilities likely will trigger a mid-year change event for employees to change their contributions to DFSAs, regardless of whether a furlough also occurs. Separately, a furlough may trigger a mid-year change event because the employee may then be in a position to provide care for his or her children.
  • For those employees who lose health coverage during a furlough, as an alternative to COBRA, they may look to their state health insurance exchange to purchase new health insurance coverage.
  • The terms of other welfare plan coverage, such as life insurance and disability plans, during the furlough will be governed by the plan documents.

Retirement Plans

  • Employee contributions to section 401(k), 403(b) and 457(b) plans are based on the amount of pay received, so to the extent that employees are not paid during a furlough, they will not be entitled to make pretax, Roth after-tax or traditional after-tax contributions to their retirement plans.
  • To the extent that an employer makes employer matching contributions to a section 401(k), 403(b) or 457(b) plan based on employee contributions, a reduction or cessation of employee contributions will result in a reduction or cessation of employer matching contributions.
  • However, if an employer makes employer non-elective contributions on a payroll-by-payroll basis to a retirement plan (i.e., employer contributions other than matching contributions), those contributions may still need to be made during a furlough, depending on the plan’s requirements.
  • Hours of service are often used to determine an employee’s eligibility for a retirement plan, vesting in a benefit, or ability to receive an allocation of employer contributions or a benefit accrual. Employees generally will not accrue hours of service for any furlough period during which they do not perform services and for which they do not receive compensation. Accordingly, if an employee is not able to accumulate the requisite hours of service for the year (or for a payroll period), the employee may not be entitled to a year of service for retirement plan eligibility, vesting, allocation or benefit accrual purposes (absent a plan amendment to address this issue).
  • A furlough does not necessarily constitute a severance from employment for retirement plan purposes. Furloughed employees may not be entitled to receive a distribution from the retirement plan until a severance from employment occurs.
  • A retirement plan may provide for in-service withdrawals for employees in certain circumstances, including upon a financial hardship. Employers likely will see an increase in financial hardship withdrawal and loan requests if the furlough lasts for an extended period.
  • Because of rapid declines in the stock market coupled with historically low interest rates which increase the value of liabilities, many defined benefit pension plans will experience declines in funded status. Employers will need to address the funding issues to avoid triggering funding-based benefit limitations, such as restrictions on lump sum payments.
  • Employers that contribute to multiemployer pension plans will need to consider the impact of a furlough on its liability under the plan (though withdrawal liability typically is triggered by a permanent cessation in the obligation to contribute.
  • We expect to see IRS guidance in the coming days and weeks providing relief applicable to retirement plans, but unless and until that relief is issued, all retirement plans deadlines will continue to apply, including, for example, the deadline for making and transmitting contributions to the plan (including quarterly minimum funding contributions to a pension plan), the Form 5500 filing deadline, and all coverage and nondiscrimination testing requirements.

Unemployment Compensation

  • Furloughs may trigger eligibility for state unemployment compensation benefits. Employers should encourage employees to access the relevant state unemployment compensation websites for the rules applied in each state.
  • Some states have announced that they are waiving the waiting periods that normally apply before an employee may begin receiving unemployment compensation benefits.

The attorneys in Ballard Spahr’s Employee Benefits and Executive Compensation Group advise employers across industries on benefit plan matters, including issues involving furlough decisions and employee communications. Along with the firm’s Labor and Employment Group, they are monitoring developments and providing strategic guidance to clients as they respond to the unprecedented impact of the pandemic.


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.