Furlough vs layoff and the impact on benefits

Furlough vs layoff: three things employers need to know as coronavirus prompts unprecedented leave of absence

(Download the Ultimate Guide to Managing Benefits During COVID-19)

Furlough vs layoff? A question being asked by employers across America as the COVID-19 pandemic freezes business operations. Many businesses are being forced into difficult workforce decisions in order to financially survive this crisis and keep their doors open. In the last four weeks alone, more than 17 million Americans have filed for unemployment benefits according to the Department of Labor.

As employers navigate the decision to furlough or layoff employees its helpful to understand the impact each of these actions has on your employees’ benefits and the legal implications you need to consider. In this post, we cover:

Furlough vs layoff: understand the difference
Furlough vs layoff: impact on your benefit program
Furlough vs layoff: legal implications

Furlough vs layoff: understand the difference

Furloughs are meant to be temporary periods of leave for a defined and finite period. With furloughs, your employees will remain as employed during their time away. Unlike a furlough, layoffs are permanent with no expectation for the employee to return. While functionally both options are similar, furloughs may be better for employee morale and instill hope in a future return to work after the coronavirus is behind us. If you are a small business, the federal government has also launched disaster loan assistance programs that could help you avoid furloughs and layoffs all together.

Impact on benefit programs: layoff

With a layoff, employees are terminated, which initiates a COBRA qualifying event for benefits coverage. With the qualifying event, individuals will receive an election notice in the mail and can choose to continue their coverage by paying their portion of the cost, or they can choose to find their own insurance elsewhere. Typically, continuation of medical, dental, vision, and other benefits coverage lasts for a period of up to 18 months but can be extended longer under some scenarios. If you have individuals that have experienced an event, they may ask you about whether they should accept COBRA coverage or try to find alternative options. Every situation is different but staying on employer coverage may be the best option as it provides certainty in benefit plan design and continuation of coverage. Employees should explore options and compare COBRA against federal and state exchange options that may offer subsidies depending on their annual income.

We have heard rumors that government sponsored COBRA subsidies may be included as part of future stimulus bills, but this has not yet been finalized. We will keep our partners updated as this evolves. If you need help with COBRA benefits, Navia offers these services, and you can click here for more information.

Impact on benefit programs: furlough

With a furlough, employees remain with the company and generally stay on any benefit programs they were already enrolled in. With a situation like the coronavirus pandemic, the furlough timeframe is largely unknown. This makes it very difficult for companies to predict how long they can afford to offer benefits to individuals that have been furloughed. Employers that do want to offer benefits continuation must also decide how any employee portions of premiums will be collected when they are not receiving a paycheck. Here are three options employees can choose from:

Pre-payment: Employers may offer the option to make a prepayment prior to going out on furlough. Generally, the payment would be taken from the last paycheck prior to leave.
Catch-up on return: Employers can cover the premium cost for the time of leave, and employees can do a catch-up contribution when they return to work.
Pay as you go: Employers can allow employees to make contributions to benefit programs while they are out on leave. This option allows employees to remain current with payments and not face a large reduction in pay on either side of the furlough.

<<Get help collecting employee premiums with Navia’s Leave of Absence Direct Billing service>>

Furlough vs layoff: legal considerations

When navigating different options, there are legal requirements to understand. We have outlined the top four legal considerations to think about when faced with layoffs or furloughs.

Furlough and COBRA rights: In general, COBRA is offered when there is a loss of coverage due to a termination event or reduction in hours. An increase in the employee’s insurance premium due to reduction in hours could be considered a loss of coverage and trigger COBRA rights. Consult with your legal advisor for state specific requirements.
Insurance Plan Documents: When employees are placed on furlough, make sure your plan documents are designed to allow for continuation of insurance coverage. Plan eligibility requirements could be triggered with a reduction of hours and could make participants ineligible for coverage. Connect with your carriers to make sure eligibility requirements are met for individuals to continue with plan coverage.
Unemployment Insurance: It is likely that employees will ask you about unemployment insurance eligibility. While rules vary state by state, generally with both furloughs and layoffs employees are eligible to collect unemployment benefits.
Affordable Care Act (ACA) Penalties. Employers are required to offer coverage to 95 percent of full-time employees. Removing insurance coverage for furloughed employees could trigger ACA penalties. Check with your legal advisor to make sure you avoid these penalties.

Navia is committed to helping our partners understand each of these options, and we are here as a resource during these challenging times. Please feel free to contact our team with any additional questions about options that might be available to help employees.