Benefits compliance shortcomings related to leaves typically arise from common operational gaps, misguided assumptions, or misunderstood regulatory obligations rather than deliberate noncompliance. Reviewing common compliance blind spots – particularly those related to when eligibility ends – can help reduce risk and strengthen overall plan administration. This article is limited to group benefits compliance considerations, not employment protections or state leave laws. For support with adhering to state leave laws, please ask your broker or consultant about NFP Talent Solutions services. For further support with absence management strategy, including vendor evaluation and process design, please ask your broker or consultant about Totalis Benefits.
1. Not having a comprehensive leave policy that addresses group benefits
While leaves of absence are often associated with employment protections under FMLA and similar state laws, they also involve important benefit protections under ERISA, ACA, COBRA, IRC Section 125 cafeteria plan rules, and FMLA. Without a comprehensive leave policy that addresses group health and welfare benefits, employers risk making costly compliance mistakes that could lead to participant litigation, federal or state enforcement actions, and even having to self-insure claims denied by carriers, including stop-loss insurers.
To reduce this risk, a leave policy should be consistent with the terms of the employer’s group benefit plans and address when coverage ends during leaves of absence; responsibility for making any required employee contributions before, during, or after leave; necessary processes and procedures for requesting or certifying leave; and the consequences of failing to comply with any processes and procedures. Employers should draft their leave policies in consultation with their carriers (including stop-loss insurers) and any third-party administrators in order to ensure all parties agree on policies and implementation.
Regardless of their size or location, employers are increasingly subject to federal and state leave laws requiring them to provide paid or unpaid leave to employees for specified reasons. Complicating matters, each law provides different employment and benefit protections to employees and imposes different compliance requirements. As a result, employers with employees spread out across a number of states may be subject to a patchwork of state paid leave laws in addition to federal leave mandates.
Leave programs can add strategic value to an employer’s benefits offerings, in addition to protecting employers against compliance risks. Aligning policies with diversity and wellness goals can help employers support employee wellbeing, enhance talent attraction and retention, and reduce employee burnout. To understand how NFP Talent Solutions can help you design, establish, and administer a comprehensive and compliant leave policy for your employees, please ask your NFP consultant or broker for more information.
2. Making eligibility exceptions
Employers sometimes wish to make exceptions to their plan eligibility terms in order to keep an employee’s medical coverage in force during an extended medical leave. While well-intentioned, granting one-off exceptions may violate ERISA’s fiduciary duties to operate the plan in accordance with its written terms and ensure that benefits are provided only to eligible employees. In addition, exceptions expose employers to significant financial risk, particularly if a high-cost claimant or catastrophic claim is involved. In the event a carrier or stop-loss insurer performs an eligibility audit and determines that an employee was ineligible for coverage at the time they received services, it could deny coverage, leaving the employer on the hook to pay those claims.
The risks of making exceptions may be particularly pronounced for self-insured employers, who rely on stop-loss insurance policies to backstop catastrophic claims. Employers should always communicate directly with their stop-loss carrier regarding any special situations (e.g., exceptions to eligibility requirements or standard operating procedures) to obtain approval and determine if and how their stop-loss coverage will be impacted. For more information specific to self-insured employers, please ask your broker or consultant for a copy of the NFP publication Self-Insured Group Health Plan Compliance Considerations: A Guide for Employers.
3. Not confirming eligibility terms with carriers (including stop-loss carriers)
Instead of making ad hoc exceptions, employers interested in offering extended eligibility to employees should establish a formal leave policy consistent with the plan terms, which may need to be amended. Crucially, before implementing a new leave policy, employers must confirm any new eligibility terms with their carriers (including stop-loss insurers). Having a written, carrier-approved leave policy allows an employer to administer extended eligibility fairly for similarly situated employees and mitigates the legal and financial risks associated with granting exceptions.
At a basic level, the written terms of a group health plan establish, among other things, which employees are eligible to participate in the plan and which benefits are covered under that plan. A contract between a health plan and an insurer, whether a carrier for group health insurance benefits or a stop-loss insurer, allocates the risk of paying claims between the employer and the insurer. Ultimately, however, the employer is responsible for ensuring participant claims are paid. If plan eligibility or coverage terms do not match the specific policy details issued by the insurer, an employer may find themselves responsible for paying claims not covered by the insurer’s policy. Securing the insurer’s approval of a leave policy can avoid such unexpected coverage gaps.
Self-insured employers typically secure reinsurance (in the form of stop-loss insurance) to provide financial protection against higher-than-anticipated claims. Because stop-loss insurance protects primarily against catastrophic claims, gaps in coverage between the employer’s leave policy and the stop-loss policy carry enormous risk. Self-insured employers should carefully reconcile their stop-loss policy with their plan document terms. Many stop-loss carriers have a “mirroring” policy that states the underlying plan documents will be used to determine eligible claims and individuals. Therefore, it is critical for employers to have a documented leave policy, consistent with the plan terms, that addresses how long an employee can remain on the plan while not actively at work, and to ensure the plan is operated in accordance with those plan terms.
4. Not incorporating ACA measurement rules into eligibility end dates
For applicable large employers (ALEs) subject to the ACA’s employer mandate, correctly administering leaves of absence requires faithfulness to the measurement method used to determine ACA full-time employee status and how to count hours of service. Employers that mistakenly assume an employee’s eligibility for major medical coverage ends when the employee commences a non-FMLA leave of absence, or who fail to count required hours of service for an employee on leave, risk incurring penalties under the ACA.
Specifically, employers that use the look-back measurement method must continue to apply stability periods during leaves of absence. Under the look-back measurement method, an employee who measured as a full-time employee (i.e., worked an average of 30 or more hours per week) during the preceding measurement period must be offered medical coverage for the entire corresponding stability period, regardless of how many hours the employee works during the stability period (even if that number is zero). This means that an employee who is in a stability period may remain entitled to coverage under the ACA while they are on leave, regardless of whether the leave is subject to FMLA or a similar state law protection.
Employers must also properly count an employee’s hours of service during leave. Paid leaves generally are counted as hours of service toward full-time employee status. In particular, paid short- and long-term disability hours must be counted if the employer pays any portion of the premium, either directly or indirectly. On the other hand, unpaid leaves generally are not included in the hours-of-service calculation unless “special unpaid leave” rules apply, like in cases of leave under FMLA, USERRA, or jury duty. When an employee experiences a special unpaid leave, ACA rules require an employer to neutralize the effect of these unpaid hours on an employee’s average hours of service.
For more information on ACA measurement methods and calculating hours of service, please ask your broker or consultant for a copy of the NFP publications ACA: Employer Mandate Measurement Methods and ACA: Employer Mandate Full-Time Employees.
5. Not providing COBRA notices when eligibility ends during leave
Not offering COBRA timely (or at all) when employees lose health plan eligibility on leave is a frequent and potentially costly mistake. This happens when an employer doesn’t realize that exhaustion of protected leave (e.g., under FMLA or state equivalent) and allowable leave (i.e., under the employer’s leave policy) means the employee is no longer eligible for coverage. When coverage is lost under the plan terms, this is a “reduction of hours” COBRA qualifying event, even if the employee remains employed.
Employers must remember that they have ultimate responsibility for COBRA compliance, regardless of whether they use a COBRA administrator. In order to ensure COBRA election notices are sent when required, employers should adopt reliable procedures (e.g., through electronic file feeds) to ensure timely communication of COBRA qualifying events to COBRA administrators, carriers, and TPAs.
For further information on COBRA qualifying events and election notice requirements, please ask your broker or consultant for a copy of the NFP publication COBRA: A Guide for Employers.
6. Not clearly communicating life and disability benefit eligibility terms to participants
ERISA requires distributing summary plan descriptions (SPDs) to participants and beneficiaries that describe rights and obligations under the plan, including eligibility requirements, within 90 days for newly covered participants. However, for many employees, understanding the life and disability plan terms is most important in the event of a leave, not when they initially receive SPDs. This is especially true during medical leaves when access to disability and life insurance can be a particular concern.
In addition to COBRA election notices that detail health coverage continuation rights, employers should clearly describe life and disability eligibility and continuation terms in leave and offboarding materials and provide complete, proactive responses to coverage inquiries. To avoid omissions, employers should include key details (such as claim administrator contact information and any conversion deadlines) and furnish the plan document and SPD upon inquiry, even if previously provided.
7. Not sending required group term life insurance conversion or portability notices
Group term life insurance is a widely offered and valued benefit, but few employers recognize that administrative missteps can result in them being held financially responsible for life benefit claims. After a certain amount of leave time has passed, eligibility ends and conversion or portability rights are triggered under the plan terms. Common leave administration mistakes include failing to correctly apply group term life insurance eligibility end dates, continuing to collect premiums on coverage that is no longer in force, and failing to distribute conversion or portability forms as directed under the plan terms or carrier agreement.
Importantly, fully insuring through a carrier or using a payroll vendor does not transfer compliance responsibility away from the employer. Under ERISA, employers hold ultimate fiduciary responsibility for administering group term life benefits according to plan terms. For further information, please ask your broker or consultant for a copy of the NFP publication Group Term Life Insurance: A Guide for Employers.
A proactive review of plan documents, administrative practices, and coordination with carriers and payroll vendors can help ensure eligibility changes are timely processed, reducing legal and financial risk for employers and employees’ beneficiaries alike.
8. Not administering premium payments properly
Employers and employees must make arrangements for payment of group health plan premiums during periods of unpaid FMLA leave. A comprehensive leave policy should set rules for payment of premiums for employees on unpaid, non-FMLA leave, for which the FMLA rules may serve as useful guidelines. Special rules require employers to provide a grace period and notice before coverage can be terminated for nonpayment.
An employee on FMLA leave cannot be required to pay more than their regular contribution amount for group health coverage. Employers generally have three options for requiring payment of contributions during periods of FMLA leave: pre-payment, payment at regular intervals during leave (e.g., monthly or according to a regular payroll schedule), or catch-up payments upon the employee’s return. An employer cannot require pre-payment as the only payment option. While employers must provide written notice of the procedures for making contributions with an FMLA eligibility notice, they should also outline these procedures in leave policies and plan documents and apply them consistently.
An employer may terminate an employee’s health coverage during FMLA leave if a required contribution is more than 30 days late (unless the employer’s policy allows a longer grace period) and the employer provides written notice of nonpayment. The notice must inform the employee that benefits will terminate if payment is not received by a specified date at least 15 days after the date of the notice. However, even if an employee’s health coverage terminates for nonpayment during FMLA leave, an employer still must reinstate the employee’s coverage upon return.
9. Not complying with state PFML requirements for remote employees
Approximately one-third of states (including DC) mandate some level of paid family or medical leave (PFML) benefits based on where employees perform their work, which can fluctuate in an increasingly remote work environment. Most state PFML laws apply even if an employer has only one employee working in that state. Many states allow employers to offer private plans that satisfy their state’s specific requirements – subject to state approval – as an alternative to the state-administered plan. If remote work locations are not routinely confirmed, employers may discover they’ve been out of compliance with a particular state PFML program at the onset of an employee’s leave, without the appropriate state contributions or private plan in place. For an overview of state PFML requirements, please ask your broker or consultant for a copy of the NFP publication State PFML and Statutory Disability Programs: A Quick Reference Chart.
No two state PFML programs are the same. Each state has different rules for which leaves qualify for PFML, wage withholding, notice obligations, whether an employee can be required to use PTO (and how much) before taking leave, and how PFML benefits interact with other statutory leaves and short-term disability benefits. To keep track of which state PFML laws apply to their workforce, employers should ensure remote employees timely notify them when they relocate.
10. Improperly reimbursing dependent care FSA expenses during leaves
Under IRS rules, dependent care expenses are only reimbursable if they enable the employee or spouse to be gainfully employed. There is an exception for short absences up to two consecutive weeks. But during longer leaves, employees are not considered to be gainfully employed, meaning they will not have eligible dependent care expenses. Employees therefore may prefer to decrease dependent care FSA contributions during extended leave. Continuing contributions during a time when no eligible expenses are incurred increases the risk of forfeitures under the “use-it-or-lose-it rule.”
The Section 125 midyear election change event rules allow an employee to change a dependent care FSA election because of any change in daycare use, provider, or cost. Employers should ensure that employees beginning extended leaves are aware of the option to stop contributions for the leave period and make a new election upon return. For further information on changing Section 125 cafeteria plan elections during leaves, please ask your broker or consultant for a copy of the NFP publication Midyear Election Change Events: A Guide and Matrix for Employers.
Many employers use a third-party administrator to help with dependent care FSA administration. However, the employer remains responsible for ensuring that only qualifying expenses are reimbursed. In order to maintain appropriate oversight and prevent employee misunderstandings, employers should ensure that the requirements for qualifying expenses are clearly communicated, including the implications of continuing contributions during leaves of absence.
Final Thoughts
Employers can significantly reduce benefits compliance risk by aligning leave policies with plan terms, administering benefits consistently, and coordinating closely with carriers (including stop-loss), TPAs, and payroll vendors. Clear, proactive communication of eligibility terms, contribution requirements, and continuation rights helps prevent costly misunderstandings and compliance missteps during leave. Ultimately, a disciplined and well-documented approach to benefits administration during leaves strengthens both compliance and the overall employee experience.