Consider These Benefit Issues Before You Furlough or Terminate Employees

Which benefits will employees keep, and for how long?

By Brian M. Johnston and Suzanne G. Odom © Jackson Lewis March 25, 2020
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In light of the nation's response to COVID-19, the disease caused by the coronavirus, and the resultant economic downturn, employers of all sizes face the moral and financial dilemma of evaluating employee headcounts.

Many employers are considering furloughs or other types of approved leaves of absences to reduce immediate payroll, hoping the downturn lasts for a period of a few weeks instead of months. Other employers are opting to implement systemic reductions in the workforce and let employees go.

Different employment actions produce different employee benefits consequences that must be part of any employment decision. No general rules apply to every situation, as all circumstances are somewhat unique.

Below is a list of several key issues employers should consider as they evaluate their employee benefits programs with an eye toward reducing payroll costs:

  • Don't assume coverage continues during leaves or furloughs, or automatically ends immediately on termination of employment. Plan terms typically dictate whether active coverage can continue during short-term leaves of absence, whether paid or unpaid, and many plans have minimum hour requirements to maintain active coverage. Employers that expand coverage for ineligible employees outside the terms of the plan or policy without consent from the insurer or stop loss carrier face significant financial exposure.
  • Understand that COBRA continuation coverage (or state continuation coverage, if any) generally must be offered for all group health plans when there is a loss of coverage because of a termination of employment or reduction in hours. An increase in the employee's share of the premium because of his or her reduction in hours (including to zero, as in a furlough) is a loss of coverage for this purpose.
  • Consider the Affordable Care Act (ACA) employer penalty. Terminating the group health plan coverage for an employee when a leave or furlough begins may cause an ACA penalty for failing to offer coverage to 95 percent of full-time employees. COBRA coverage must remain affordable to avoid an ACA penalty, which may require a continued or increased employer subsidy.
  • Plan how employees will keep paying monthly premiums/contributions to maintain coverage during any leave period. Employees' failure to pay monthly premiums for COBRA coverage could cause coverage to lapse for health, dental and vision plans. For flexible spending accounts (FSAs), employees' failure to pay premiums could invalidate their future health FSA and dependent care FSA claim reimbursements. Arrangements should be made in advance with employees about how they will keep contributing to any allowable coverage during leave, whether through a COBRA vendor, ACH payment from a personal checking account or by mail.

[SHRM members-only HR Q&A: How Does the Families First Coronavirus Response Act (H.R. 6201) Impact Employers?]

  • Determine if there has been any formal or informal severance plan or policy that would provide a precedent for what benefits to offer terminated employees.
  • Consider 401(k) and other retirement plan implications. A reduction in force, layoff or furlough could cause a "partial termination" under a 401(k) or other retirement plan rules, which triggers 100 percent vesting for affected participants. Review hardship and other distribution provisions, and make sure plan loan provisions are reviewed and followed so that "deemed distribution" consequences may be avoided. Service credits for vesting and employer contributions can also still be required during leaves or breaks in service.
    "Safe harbor" match or other fixed contribution provisions should be suspended only after considering the potential ramifications and taking the required implementation measures. Employers should be vigilant in maintaining the same payroll deposit schedule for employee salary deferrals.


  • Review all deferred compensation agreements and other employment agreements for any leave or termination impact. Such agreements may have short-term bonus payouts or other incentive payment obligations due to any "termination without cause" or other "separation from service" that cannot be altered without a review of all implications of Section 409A of the tax code. These rules generally prohibit employees from making salary deferral election changes midyear (including canceling elections) and/or changing the timing of payments.

This is by no means an exhaustive list of all issues to consider before final decisions are made related to any short-term or long-term reduction in employee payroll. Each employer must evaluate the issues to find the best options during these challenging times.

Brian M. Johnston is an attorney in the Overland Park, Kan., office of Jackson Lewis P.C. Suzanne G. Odom is an attorney in the firm's Greenville, S.C., office. This version is edited slightly from the original, as posted on the firm's website. © 2020 Jackson Lewis P.C. All rights reserved. Reposted with permission.

Related Resource:

Top 10 Employee Benefits Issues in a Slowing Economy, Squire Patton Boggs, March 2020

Related SHRM Articles:

IRS and DOL Unveil Employer Tax Credits for Coronavirus-Related Leaves, SHRM Online, March 2020

When Employers Must Cut Their 401(k) Contributions to Stay AfloatSHRM Online, March 2020

U.S. Factories Closing Due to Coronavirus Concerns but Some Must Keep Producing, SHRM Online, March 2020

Employers Advised to Ponder Worst-Case Scenarios, SHRM Online, March 2020


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