Maintaining Health Plan Coverage During FMLA Leave

 

The Family and Medical Leave Act (FMLA) is a federal law that provides eligible employees of covered employers with unpaid, job-protected leave for specified family and medical reasons. The FMLA covers private-sector employers if they have 50 or more employees during 20 or more calendar workweeks in the current or previous calendar year.

 

Under the FMLA, eligible employees may take leave for their own serious health conditions, for the serious health conditions of family members, to bond with newborns or newly adopted children or for certain military family reasons. In addition to providing eligible employees with an entitlement to leave, the FMLA requires employers to maintain employees’ health plan benefits during leave and to restore them to the same or equivalent positions after leave ends.

 

This Compliance Overview summarizes the FMLA’s requirements for maintaining health plan benefits during an employee’s FMLA leave. It also addresses the obligation to offer continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) after FMLA leave is exhausted or expires. Applicable large employers (ALEs) should also consider how an employee’s leave impacts their coverage obligations under the Affordable Care Act’s (ACA) employer shared responsibility, or “pay-or-play” rules.

 

Maintaining Health Plan Coverage

 

Employer Responsibilities

 

While an employee is on FMLA leave, an employer must maintain the employee’s group health plan coverage on the same basis as if the employee had continuously worked throughout the leave period. If the employer introduces a new health plan option or otherwise modifies health benefits or plans while an employee is on FMLA leave, the employee is entitled to those changes to the same extent as if the employee were not on leave. Similarly, any other plan modifications (e.g., changes to coverage, premiums or deductibles) that apply to all employees would also apply to an employee on FMLA leave. Employers must notify employees on FMLA leave of an opportunity to change plans or benefits.

 

Employees on FMLA leave retain the same rights as active employees to make health plan changes during open enrollment. Employers should provide employees on FMLA leave with open enrollment materials and allow them to make the same election changes as active employees. Also, if the health plan permits an employee to change from single to family coverage upon the birth of a child or otherwise add new family members, that option must be available to employees on FMLA leave.

 

Additionally, if a full-time employee switches to a part-time schedule because of an intermittent leave or reduced leave schedule under the FMLA, the employee must continue to receive the same level of health plan coverage they had before starting the FMLA leave and may not be required to pay more to maintain that same level of benefits, regardless of the employer’s benefits policy for part-time employees.

 

An employer is not obligated to maintain health benefits during FMLA leave in the following situations:

 

 

However, an employer may be required to offer COBRA continuation coverage when an individual does not return to work from an FMLA leave (or notifies their employer of their intent not to return to work), as explained below. Also, employers may require employees to continue health plan coverage during an unpaid FMLA leave if employees are allowed to discontinue their premium contributions during the leave. The employer can recover the employee’s share of contributions when the employee returns to work.

 

An employee returning from FMLA leave must be restored to their original position or to an equivalent position, with equivalent pay, benefits and other terms and conditions of employment. This requirement includes all benefits provided or made available to employees by an employer, including group life insurance, health insurance, disability insurance, sick leave, educational benefits and retirement benefits. When benefits must be restored, the employee cannot be required to requalify for them. However, the benefits are subject to any changes in benefit levels during the leave that affect the entire workforce.

 

Group Health Plans

 

For FMLA purposes, a group health plan includes both fully insured and self-insured health plans that are maintained (or contributed to) by an employer to provide healthcare to employees or their families. This broad definition is not limited to traditional medical coverage.

 

For example, employers may be required to maintain coverage during FMLA for the following types of plans:

 

 

The FMLA’s definition of group health plan specifically excludes voluntary benefit arrangements where individuals purchase individual policies from insurers, so long as the employer’s role is limited to collecting premiums through payroll deduction and forwarding the premiums to the insurance company. For this exclusion to apply, the employer cannot contribute toward the cost of coverage, employees’ participation must be voluntary, the premium cannot increase in the event the employment relationship is terminated, and the employer cannot receive cash (or other consideration) in connection with the program except for reasonable compensation for administering payroll deductions.

 

In addition, benefit plans that do not provide healthcare are not subject to the FMLA requirement to maintain coverage during leave. These benefits include, for example, life insurance, disability plans, dependent care FSAs and retirement plans. An employee’s entitlement to benefits other than group health benefits during a period of FMLA leave (e.g., holiday pay) is determined by the employer’s established policy for providing such benefits when the employee is on other forms of leave, whether paid or unpaid.

 

Paying for Coverage During Leave

 

An employer may require employees taking FMLA leave to pay their share of health plan premiums, but not more than the amount they would have paid if they had not taken leave. If premiums are raised or lowered, employees on FMLA leave would be required to pay the new premium rates.

 

Payment Methods

 

Most employers allow employees to pay for their share of health plan premiums on a pre-tax basis through a Section 125 cafeteria plan. When an employee substitutes paid leave for unpaid FMLA leave, employee premium contributions should continue to be deducted from their pay as usual. However, if the leave is unpaid, employers should ensure they have a process for employees to make contributions for their health coverage.

 

IRS regulations for cafeteria plans provide three options for paying health plan premiums during an unpaid FMLA leave, as outlined below. A cafeteria plan may allow one or more of these options, subject to certain limitations. In general, any payment options offered to employees on non-FMLA leave must also be offered to employees on FMLA leave.

 

 

Employers must provide employees taking FMLA leave with advance written notice of the terms and conditions under which these payments must be made, including their due dates. Employers may require that payment be made to the employer or to the insurance carrier, but no additional charge may be added to the employee’s premium payment for administrative expenses.

 

Failure to Pay Premiums During Leave

 

If an employee’s premium payment is more than 30 days late, an employer may drop the employee’s health plan coverage unless the employer has a policy of allowing a longer grace period. Employers must notify employees on FMLA leave before health plan coverage is dropped due to a lack of premium payments. Generally, an employer must provide written notice to the employee at least 15 days before coverage is to cease. The notice must explain that the payment has not been received and that coverage will be dropped on a date that is at least 15 days after the date of the letter, unless payment is received by that date.

 

Even when an employer terminates health plan coverage due to an employee’s failure to pay their payments, all other obligations under the FMLA continue, including the obligation to reinstate the employee upon return from leave to their original position or to an equivalent position, with equivalent pay, benefits, terms and conditions of employment.

 

Alternatively, when an employee stops making premium payments while on FMLA leave, the employer may decide to maintain the employee’s coverage by paying the employee’s share of the premium. After the FMLA leave ends, the employer may be able to recover from the employee the portion of the employee’s share of the premium it paid, as described below.

 

Recovering Premium Payments

 

If the employer chooses to maintain health benefits during an employee’s unpaid FMLA leave by paying the employee’s share of premiums, the employer is entitled to recover the costs incurred for paying the employee’s share of premiums at the end of leave, regardless of whether the employee returns to work.

 

An employer may recover from an employee the employer’s share of health plan premiums paid during the employee’s unpaid FMLA leave if the employee fails to return to work after their FMLA leave has been exhausted or expires, except when the employee does not return to work because of:

 

 

An employee who returns to work for at least 30 calendar days is considered to have "returned" to work for the purposes of the FMLA. In addition, an employee who transfers directly from taking FMLA leave to retirement or retires during the first 30 days after returning to work is considered to have returned to work.

 

When paid leave is substituted for FMLA leave, the employer may not recover its share of health plan premiums for the period covered by paid leave. Additionally, recovery of health plan premiums does not apply to paid leave provided under a plan covering temporary disabilities, including workers’ compensation.

 

To the extent recovery is allowed, the employer may recover the costs through deduction from any sums due to the employee, provided such deductions do not violate applicable federal or state wage payment or other laws. Alternatively, legal action may be initiated against the employee to recover such costs. However, an employer cannot condition the availability of COBRA coverage upon the employee’s reimbursement of any premiums paid by the employer for coverage during the FMLA leave.

 

Under certain circumstances, the employer may elect to maintain other benefits (e.g., life or disability insurance) by paying the employee’s share of the premiums during periods of unpaid FMLA leave. At the conclusion of the leave, the employer is entitled to recover only the costs incurred for paying the employee’s share of any premiums, regardless of whether the employee returns to work.

 

Offering COBRA Coverage

 

COBRA is a federal law that requires employers with at least 20 employees to provide employees and dependents who lose group health benefits due to a qualifying event with an opportunity to continue group health coverage on a self-pay basis for a limited time. Qualifying events are specific events, such as a termination of employment, reduction in hours of service, divorce or death, that would cause a loss of coverage under the health plan for the employee or their covered spouse or dependent child.

 

Taking FMLA leave by itself is not a qualifying event that triggers COBRA rights. However, a COBRA qualifying event occurs when the following conditions are met:

 

 

Any lapse of group health plan coverage during FMLA leave is irrelevant in determining whether a COBRA qualifying event has occurred. The maximum period of COBRA coverage is generally measured from the last day of FMLA leave. Employers should provide a COBRA election notice when an employee does not return to work at the end of an FMLA leave (or notifies their employer that they will not be returning to work).

 

Interaction with Pay-or-Play Rules

 

The ACA’s pay-or-play rules impose additional requirements for employees who take FMLA leave, including counting hours of service during the leave and maintaining coverage during an entire stability period. As background, the ACA’s pay-or-play rules require ALEs to offer affordable, minimum-value health coverage to their full-time employees (and dependents) or face a penalty from the IRS. An ALE is an employer that averaged at least 50 full-time employees, including full-time equivalent employees, during the preceding calendar year. A full-time employee is an employee who was employed, on average, at least 30 hours of service per week (or 130 hours in a calendar month). The following two methods are available for determining full-time employee status:

 

 

To determine if employees meet the ACA’s threshold for full-time status (i.e., 30 hours of service per week), an ALE must count each hour for which an employee is paid, or entitled to payment, for the performance of duties, as well as each hour for which an employee is paid or entitled to payment for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity, layoff, jury duty, military duty or leave of absence. This means that paid leave generally counts toward an employee’s hours-of-service total, which can affect their full-time status determination.

 

The look-back measurement method has rules for calculating hours during certain periods of unpaid leave. During a measurement period, ALEs must average hours during “special unpaid leave periods,” which include leave under the FMLA. Under the averaging method, ALEs can either:

 

 

Also, under the look-back measurement method, an employee generally retains their full-time (or non-full-time) status during the entire stability period, regardless of their hours of service during the stability period, so long as they remain an employee of the ALE. Thus, to avoid potential penalties, an ALE should maintain affordable health coverage for full-time employees during a stability period, even if they remain on leave after they exhaust their right to job-protected leave under the FMLA.

 

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