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Furloughs May Impact Pension, Health Care, and Fringe Benefits

Furloughs May Impact Pension, Health Care, and Fringe Benefits

IOMA's Report on Managing Benefits Plans

September 03, 2009

COBRA considerations. In enacting the American Recovery and Reinvestment Act (ARRA), Congress added a temporary subsidy to help individuals who have lost their jobs to pay Consolidated Omnibus Budget Reconciliation Act premiums for group health care coverage. Individuals who become eligible for COBRA continuation rights because of an involuntary termination of employment between Sept. 1, 2008, and Dec. 31, 2009, pay only 35 percent of the COBRA premium. Initially, the remaining 65 percent of the premium is subsidized by the employer and reimbursed by the federal government through a credit to the employer’s payroll taxes. The premium reduction applies to periods of health coverage beginning on or after Feb. 17, 2009, and may last for up to nine months.

IRS subsequently released Notice 2009-27, which provides, among other things, that “an involuntary reduction to zero hours, such as a layoff, furlough, or other suspension of employment, resulting in a loss of health coverage is an involuntary termination for purposes of the premium reduction.” Cowart said under Notice 2009-27, if reduced hours or unpaid leave results in an employee’s moving off the employer’s health plan, it could be considered an involuntary termination if the employee is forced to quit in response to the reduction in hours. The reduction in hours without the employment termination can bea qualifying event to trigger COBRA but would not make the individual eligible for the COBRA subsidy. Thus, if the reduction in hours forces an employee to lose coverage, but the employee does not terminate employment, then the employee would be eligible for COBRA but not the COBRA subsidy, she said.

Furloughs also can affect flexible spending accounts – which allow employees to set aside pre-tax money to pay for things such as day care expenses, health care expenses, or commuter benefits.

For day care expenses, employees make their elections assuming they are going to work a certain number of hours; if that amount is reduced, they may need less day care, Cowart said.

An employee may want to adjust the amount he or she is contributing to an FSA toward dependent care, but that depends on whether that employee qualifies as having a change in status under tax code Section 125. Taking an unpaid absence could be a change in status triggering an opportunity to change elections, Cowart said. The plan must be designed to include the taking of an unpaid leave of absence as a change of status, however, as employers are not required to recognize all of the change in status options.

© YellowBrix 2009

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