Employee Benefits During Financial Difficulty
Carrier Updates
Thursday, February 27 2025
When an employer experiences financial hardship, the situation can raise concerns regarding its employee benefit programs. Employers can experience financial strain for any number of reasons — low sales and revenue, increased overhead costs, natural disasters, reduced funding, a pandemic or financial mismanagement. In such a situation, an employer typically has questions regarding its employee benefits plan and the costs associated with its offerings.
Following are considerations for employers when addressing one of these difficult financial situations. Plan documents and termination vs. furlough vs. layoff Some employers will have to respond to an economic downturn by terminating employees, implementing layoffs or furloughing employees. It’s important to remember that “termination,” “furlough” and “layoff” are not defined terms under ERISA or the Affordable Care Act.
A furlough is considered to be a mandatory leave with limited or no pay, with the expectation that employees will return to work once regular business resumes.
A termination and a layoff are more similar, but an employee who is temporarily laid off will be asked to return to work. The problem from an employee benefits perspective is that plan documents do not usually differentiate between an employee who is terminated vs. one who is laid off vs. one who is furloughed.
For benefits purposes, eligibility is limited to active full-time employees and employees who work at least a minimum number of hours per week (e.g., 30). If an employee is on protected leave — such as those granted under the FMLA — benefits continue during leave. This means that any employee who is not meeting the hours requirement or is not actively at work (work from home is considered actively at work) based on being terminated, furloughed or laid off — even temporarily — will generally have their benefits terminated and receive an offering of COBRA or state continuation, or have no offer of continuation, depending on the employer’s size and state in which the business is located.
It’s important to review the plan documents from the carrier to determine whether leave is paid or unpaid and to determine how long benefits may continue during a furlough or layoff. It’s also important to determine whether the carrier will allow coverage to continue as long as premiums continue to be paid.
For a self-funded/self-insured plan, the employer should look at its own summary plan description, plan document and Stop-Loss Insurance policy to determine how coverage is affected during a furlough or layoff.
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Following are considerations for employers when addressing one of these difficult financial situations. Plan documents and termination vs. furlough vs. layoff Some employers will have to respond to an economic downturn by terminating employees, implementing layoffs or furloughing employees. It’s important to remember that “termination,” “furlough” and “layoff” are not defined terms under ERISA or the Affordable Care Act.
A furlough is considered to be a mandatory leave with limited or no pay, with the expectation that employees will return to work once regular business resumes.
A termination and a layoff are more similar, but an employee who is temporarily laid off will be asked to return to work. The problem from an employee benefits perspective is that plan documents do not usually differentiate between an employee who is terminated vs. one who is laid off vs. one who is furloughed.
For benefits purposes, eligibility is limited to active full-time employees and employees who work at least a minimum number of hours per week (e.g., 30). If an employee is on protected leave — such as those granted under the FMLA — benefits continue during leave. This means that any employee who is not meeting the hours requirement or is not actively at work (work from home is considered actively at work) based on being terminated, furloughed or laid off — even temporarily — will generally have their benefits terminated and receive an offering of COBRA or state continuation, or have no offer of continuation, depending on the employer’s size and state in which the business is located.
It’s important to review the plan documents from the carrier to determine whether leave is paid or unpaid and to determine how long benefits may continue during a furlough or layoff. It’s also important to determine whether the carrier will allow coverage to continue as long as premiums continue to be paid.
For a self-funded/self-insured plan, the employer should look at its own summary plan description, plan document and Stop-Loss Insurance policy to determine how coverage is affected during a furlough or layoff.
To Read More Click Here