During COVID-19 “shelter in place” orders, many employers are choosing to put employees on furlough or unpaid leave and continue eligibility under the health plan throughout the duration of the furlough. If that’s the case, the question then becomes, can the employer charge the employee for their portion of the premiums? And how does the employer collect those premiums when there’s no paycheck or the paycheck isn’t large enough?
In this case, the FMLA rules regarding premium payment can be helpful. In general, the FMLA rules allow for premiums to be paid either in advance, during the leave or after the employee returns from the leave or furlough.
Let’s look closer at each of these options.
First, when the leave is foreseeable, the employee can agree to pay their portion of the premium prior to the leave. However, this method isn’t really feasible when the duration of the leave is unknown or when leave is taken due to an unforeseen circumstance. Also, this method cannot be the only option offered to employees.
Second, the employee can pay their share of the cost of coverage in installments during the leave (e.g., per pay period or per month). The contributions could be paid after-tax via personal check or pre-tax salary reductions if the employee is still receiving compensation (e.g., unused sick or vacation days, or emergency paid sick or family leave). Then when the employee returns to work, the previous salary reductions would resume for the duration of the plan year unless the employee makes an election change upon returning from the leave, as allowed under the IRS Section 125 rules..
However, if the employee stops making contributions, and the employer doesn’t make payments on the employee's behalf, then the employee's benefits would terminate (subject to a 30 days grace period for late payments). If the employer continues coverage for an employee who fails to make contributions, the IRS FMLA regulations allow the employer to recoup the employee's share upon reemployment (i.e., as under the “catch-up” option). But if coverage is dropped during FMLA leave due to the employee’s failure to pay his or her share of the required premiums, the employer is required to restore coverage if and when the employee returns to work.
Third, the employer and employee can agree in advance that the employer will pay the employee's share of the cost of coverage during the leave and the employee will pay it back when he or she returns. Upon returning from leave, the employee makes special catch-up contributions to cover his or her share of the cost of coverage during the leave (i.e., the amount advanced by the employer). The cafeteria plan may permit catch-up contributions to be made on a pre-tax or after-tax basis.
Whatever payment option the employer decides to use should be clearly communicated to employees in writing. Further, employees should also understand that if premiums are not paid in time, coverage will be canceled back to the paid-to date, and any claims incurred after that date will not be covered by the health plan.