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What you need to consider when furloughing employees

May 07, 2020

Businesses across the country are closing their doors, reducing their hours and moving to working remote to comply with various state or local stay-at-home orders to combat the spread of COVID-19. At the same time, employers are assessing their options for workforce management. This includes considering furloughs, leave policies and terminations. Employers need to consider how each of these events can affect their ongoing Affordable Care Act (ACA) compliance, specifically when it comes to offers of coverage.

Under the ACA’s employer mandate, employers with 50 or more full-time equivalent employees are required to offer minimum essential coverage (MEC) to at least 95% of their full-time workforce (and their dependents), whereby such coverage meets minimum value (MV) and is affordable for the employee, or be subject to Internal Revenue Code (IRC) Section 4980H(a) penalties. 

When trying to determine whether employees are considered to be full time under the ACA, employers use one of two measurement methods sanctioned by the IRS: the monthly measurement method or the look-back measurement method.

Many employers who had previously used the monthly measurement method may want to revise their approach as they implement different workforce measures to adjust to the economic slowdown associated with the COVID-19 pandemic. These types of workforce management measures often create a more variable-hour workforce.

If your workforce is primarily comprised of variable-hour workers, the look-back measurement method will usually be the best measurement method to use for ACA compliance.

Furloughs, terminations and leave options

When considering furlough, terminations and leave options for workplace management, an employer should keep the following ACA compliance issues in mind. 

  1. Hours of service: Employees on furlough or leave generally do not accrue hours of service. From an ACA compliance tracking perspective, this makes them very similar to terminations. For an employer this can affect full-time counts for individual months, as well as the timing of an offer of coverage.
  2. Healthcare coverage during absence: Depending on company policies, employers must ask themselves whether they can rescind an offer of coverage during the furlough/leave period, or if they are going to allow their employee to stay on the employer-sponsored health plan.
  3. Offers of coverage upon return: For employers that choose to rescind an offer or delay making it during the furlough/leave period, they need to remember that if an employee entitled to coverage based on the prior measurement period returns during the current stability period, the offer must be made upon their return with a couple of caveats identified below.

Offers of coverage and the rule of parity

If the furlough, leave or temporary termination was longer than 13 weeks (26 weeks for educational employers), an employer can treat the employee as a new hire when they come back and begin the initial measurement period again.

For newer employees who go on furlough/leave, the rule of parity may apply upon their return. If the absence is shorter than 13 weeks but longer than four weeks and the absence is longer than the prior period of employment, the employer is entitled to treat the employee as a new hire and begin the initial measurement period again. The following example will illustrate this rule.

Jane is hired by Healthcare Company on February 1, 2020, and then furloughed six weeks later due to a decline in workforce needs related to the COVID-19 pandemic. If the furlough lasts longer than her initial six-week employment period, the rule of parity applies and Healthcare Company would be able to treat Jane as a new hire upon her return. If the absence lasts longer than 13 weeks, it would not matter how long the initial employment period was, and Healthcare Company would be able to treat Jane as a new hire upon return.

Whether you’re running a healthcare facility or other organization, complying with the ACA can be difficult. This is especially true today as employers utilize all of their workforce management options to deal with the economic challenges presented by COVID-19. 

To learn more about the impact of COVID-19 on ACA compliance in 2020, please contact your Wipfli relationship manager. 

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