We get questions on administering benefits for employees on approved leaves year-round. But with the new year approaching, it is important to understand the tax issues affected by your administration of group health plan benefits for employees on leave, particularly for leaves that cross calendar years.
If you provide group health benefits and an employee takes approved leave, it is likely that such employee has benefit continuation rights under federal or state law. Where leaves are unpaid, employers can (and often do) require employees to pay their share of premiums to continue coverage during the leave. Employers have options for collecting premium payments, and each option comes with its own advantages and risks.
Under the pay as you go option, an employee can continue to pay his or her share of premiums in installments during an unpaid leave. Employees might expect this approach, as it most closely mirrors payment during active employment. But it comes with potential issues. The obvious issue is that employees might have difficulty making payments when they are not receiving a steady income. But even for employees that can make payments, they cannot make these payments with pre-tax dollars under a cafeteria plan. This is true even for employees that are receiving disability benefits or paid family and medical leave benefits through a state program. The additional taxes often make employers explore the other approaches.
The next option permits employees to make catch-up payments on their share of premiums when they return to work from leave. Recoupment can be made from the employee’s first paycheck, but because this can be unduly burdensome on employees, we often see employers double up premium payments until the catch-up has been completely paid. Repayment of premiums through future payroll deductions can be made with pre-tax dollars under a cafeteria plan, so employees are put in the same position they would have been in had the leave not occurred. But the major downside with this approach is that there is the possibility that an employee does not return to work. Employers should be prepared for this scenario and must assess the risk, costs and effort that will be needed to recoup these premiums.
Finally, an employer can offer (but cannot require for FMLA leaves) a pre-paid option, where an employee pays his or her share of premiums before the leave occurs. This approach cannot work in all scenarios, but can be a good option for expected leaves (e.g., maternity or paternity leaves). Employees are incentivized to use this option because premium payments can be made on a pre-tax basis, and employers don’t have to worry about collections following a leave. But IRS guidance has made it clear that an employee cannot make pre-tax payments for premium payments for benefits to be received in a subsequent tax year. If you offer the pre-paid option, you should be aware of this rule and have a plan in place for when employees are planning future leaves this time of year.
Administering benefits for employees on leave can be challenging because so many different scenarios can arise. It is critical to think about these issues and have your playbook ready to ensure your administration is consistent for all employees and complies with legal requirements. If you have any questions on the premium payment options described above, or would like to discuss your strategy for administering your benefits, please contact any of the attorneys on our Employee Benefits team.
