Non-FMLA Unpaid Leaves of Absence Under Final Change in Status Regs

[Guest HIPAAdrome]

Ok everyone, here's a mind bender for us to chew on . . .

A lot of employers allow employees who take non-FMLA unpaid leaves of absence to continue their health plan coverage during the leave if the employee continues to pay the premium on an after-tax basis. Which also means the same employee can drop coverage during the leave if desired.

Question: How does this work, and is this allowed, under the final Section 125 regulations.

The commencement or return from an unpaid leave of absence is a change in status event under 1.125-4©(2)(iii). But the consistency rule requires that the change in status affect "eligiblity for coverage under an employer's plan." 1.125-4©(3). Because a person taking a non-FMLA unpaid leave is allowed to continue coverage, taking the leave does not affect that employee's eligiblity for coverage under the plan. So it really is NOT a change in status, right?

I think we can distinguish a few different situations:

1. A plan that allows the person to continue by paying the normal active employee rate, but on an after-tax. The employee that continues arguably is not making a change. But the employee that drops the coverages is making a change. Can we allow this by considering it a cessation of required contributions (under the original proposed regs 1.125-2 Q&A-6(e) which are unaffected by the final regs) and locking the employee out of the plan for the rest of the plan year?

2. The plan that requires the employee to continue coverage by paying 100% of the premium. This is clearly a change whether the employee continues or drops. Will we be forced to rely on COBRA to get to the desired result? What a pain!!

3. This same issue exists for plans which allow both full-time and part-time employees in the plan, but require PT employees to pay a higher employee contribution.

Thoughts? Comments?

P.S. I have a call into the IRS on this issue. I'll let you know if I hear anything.

[This message has been edited by HIPAAdrome (edited 04-17-2000).]

[Linda]

I have a similar issue with an employee group with fluctuating pay. (The fluctuations in pay do not necessarily reflect fluctuations in hours.) In some pay periods, an employee’s 125 contribution may exceed pay. Employees can continue coverage at the regular employee rate by making up the short fall on an after tax basis. But then there are employees who do not make up the short fall. I also rely on 1.125-2 Q&A-6(e), as per #1 above.

[Guest nb]

Hippadrone, I guess I don't understand your reluctance to offer COBRA for a non-FMLA leave of absence. A reduction in hours is a qualifying event for COBRA, and most plans I've seen have a "minimum # of hours" written somewhere for eligibility for a plan. So do you offer COBRA continuation to those employees that don't continue to pay the premium? That would seem to be more difficult to administer then using COBRA from the start.

[Guest HIPAAdrome]

NB: I don't really have a reluctance to offer COBRA if it is required, but you've got to admit that COBRA is a pain. You've got to give detailed notices, wait for the election, wait for the premium, etc. By the time the whole shebang is over, the employee might be back from leave.

If your plan is drafted to say that someone who takes an unpaid leave continues to be eligible for coverage, then I don't think COBRA kicks in, unless you are also raising the premium for coverage. The person's hours of employment are reduced, but they are not losing coverage as a result.

Now if this is the only way to get to the result the client wants, then the plan should be redrafted to take advantage of it. But it would be so much easier if the change in status rules could handle it.

For what it's worth, I spoke with Harry Becker at the IRS regarding these questions. He indicated that the IRS did not intend to change anything with respect to the options available to folks going on leave, but he recognized the difficulty in the language of the regulations, and said that these were "very good questions." He was going to talk with some of his colleagues and get back with me. I'll let you know what happens.

[This message has been edited by HIPAAdrome (edited 04-18-2000).]