Benefits During an Unprotected Leave of Absence

When it comes to administering health plan coverage during an employee’s leave of absence, the first step is to determine whether the employee is entitled to protected leave under federal or state law (e.g., FMLA). For purposes of this summary, an assumption is made that the employee is either not eligible for protected leave or protected leave has already been exhausted.

1. Will an employee who takes unprotected leave remain eligible for health insurance and other benefits?

If an employee enrolled in benefits takes an unprotected leave of absence or exhausts their protected leave, their continued eligibility for benefits during leave will depend on two things: the eligibility rules in the plan documents and the employer’s own leave policies.

Plan Documents

Some plan documents include specific provisions outlining how long an employee on leave may remain covered under the benefit plan before coverage terminates (e.g., plan document may allow eligibility to continue during approved leave for 60 days). When such language exists, the plan document governs. Employers should review all plan documents, including any wrap documents and underlying summary plan descriptions (SPDs) or certificates of coverage, as provisions may differ across benefits.

Employer Leave Policy

In the absence of specific language in the plan documents, it falls on the employer to determine how long an employee on an unprotected leave can remain on the benefit plans as an active participant. Some employers will address eligibility for benefits in the employer’s leave policy or employee handbook. Absent insurance carrier/stop-loss vendor restrictions, employers are free to determine eligibility while on unprotected leave. The employer’s leave policy should establish a definite period of eligibility while on leave (not open-ended), the eligibility should align with any applicable rules within the plan documents, and the employer should apply its policies consistently to all employees. In cases where plan documents and employer policies are vague, silent, or defer to the employer, it is the employer’s responsibility to interpret and apply the information available.

2. When should an employer make an offer of COBRA/continuation coverage to an employee on unprotected leave?

When to offer COBRA/continuation coverage depends on how the plan is administered according to the information in Q-1 above. If, according to the plan terms and/or employer leave policy, the employee’s leave of absence (i.e., reduction in hours) triggers a loss of eligibility for coverage; that triggers a qualifying event requiring the employer to make an offer of COBRA or state continuation coverage.

3. If an employee remains eligible for health coverage during unprotected leave, how should the employer handle premiums?

If the leave of absence is paid, employee contributions may continue to be deducted from payroll.If the leave is unpaid, the employer should have a process for obtaining employee contributions and that process should be communicated to employees. There are no rules that specifically address how employers may collect premiums during unprotected leave, so most employers follow the rules applicable to FMLA by offering at least one of the following options: (1) pre-pay on a pre-tax basis (this cannot be the sole option); (2) pay during the leave on an after-tax basis; or (3) make catch-up contributions on a pre-tax basis upon return from leave. If an employee fails to make their share of premium contributions during the leave in accordance with the employer’s communicated policy, their coverage can be terminated (potentially retroactively). Coverage terminated due to failure to pay premiums is not a COBRA qualifying event.

4. How should the employer handle health plan coverage upon the employee’s return from leave?

13-Week Rule (only applicable large employers (50 or more FTEs))

If an employee returns from unpaid leave within 13 weeks without being credited an hour of service, the employer must treat the employee as a continuing employee. If the employee was previously covered and returned as full-time, the medical coverage must be reinstated as soon as administratively possible (i.e., no later than the 1st of the month following rehire) to avoid potential ACA penalties. If the unpaid leave was longer than 13 weeks, the employee can be treated as a “new hire” upon return and subjected to a new waiting period or initial measurement period, as applicable.

§125 Rules

If the employee returns from unprotected leave within 30 days of coverage being terminated, the employer is required to reinstate the employee’s previous elections (assuming they are eligible upon return). If the leave was longer than 30 days, the cafeteria plan can be designed to reinstate the employee’s prior cafeteria plan election or allow the employee to make a new election to the same extent allowed for new hires.

5. What if the employee takes leave during their waiting period or before medical coverage becomes effective?

HIPAA’s nondiscrimination rules generally prohibit health plans from denying or delaying coverage based on an employee’s ability to work when the absence is health-related. Therefore, for health-related leave, coverage should typically become effective once the waiting period is met, even if the employee is not actively at work. If the employee does not return and no longer meets eligibility requirements, coverage may be terminated in accordance with the employer’s standard unprotected leave policies. HIPAA’s nondiscrimination protections apply only to group health plans, not to excepted benefits (e.g., dental/vision coverage, health FSAs) or non-health benefits such as life and disability insurance, which may require the employee to be actively at work before coverage begins.

Author