How Furloughs and Layoffs Affect Employee Benefits?

Posted on Friday, June 19, 2020

According to a recent survey by CNBC, 22% of U.S. businesses have been forced to furlough or lay off workers as a result of the novel coronavirus (COVID-19) crisis. Although most employers regard these actions as a last resort, it's important to know your responsibilities, particularly if you furlough workers. Following are the answers to some frequently asked questions.

Q. What's a furlough?

A. Although there's no specific legal definition, furloughs are generally described as temporary reductions in pay and hours caused by economic or other conditions. For example, an employee who is furloughed for a month doesn't work or receive payment during that time. Simply reducing a worker's pay isn't a furlough.

Q. How is a layoff different from a furlough?

A layoff is a loss of employment on a temporary or permanent basis. Because employees are employed during a furlough, many employer obligations may continue — including providing certain benefits. Generally, this isn't the case for layoffs, although an employer may agree to provide benefits to laid off employees.

Q. How do furloughs work?

A, Typically, employees are furloughed for a set time period — for example, four or six weeks — or on a regular schedule (such as every other Friday). They're still employed and generally remain eligible for benefits, depending on your written policies, collective bargaining agreements and applicable law. Although you don't have to determine a fixed period, indefinite furloughs often turn into layoffs.

Q. Are furloughed workers entitled to health care benefits?

A. It depends on the terms of your organization's health insurance plan. Employers with self-funded group plans have more flexibility and can amend existing plan documents affecting furloughs. If your company has an insured group plan, contact your broker or insurance company to determine if coverage continues or if the furlough will be treated as a layoff that terminates coverage. Note that if health coverage is terminated, COBRA generally applies to employers with 20 or more employees.

You may foot the entire bill for furloughed employees' health care premiums or rely on Family and Medical Leave Act (FMLA) policies regarding employee premium payments. Generally, the FMLA allows prepayment (although this is unlikely under current circumstances) during the furlough period or reimbursement to the employer after workers return from a furlough.

Q. How does a furlough affect retirement plan benefits?

A. Normally, employees are entitled to benefits from qualified plans such as 401(k)s based on service for which they're compensated. During a furlough, benefits won't accumulate unless your plan specifies so. Similarly, your organization's matching contributions are discontinued.

You may want to inform employees that the Coronavirus Aid, Relief and Economic Security (CARES) Act liberalizes the rules for 401(k) loans. For now, if the plan permits it, participants can borrow up to $100,000 and effectively have six years to repay the loan.

Q. What about other benefits?

A. Review your life insurance, disability insurance and flexible spending account (FSA) policies and documents to determine the benefits available to furloughed employees. You can choose to go beyond the requirements. For example, if your organization offers a dependent care FSA, you may allow employees to make adjustments for a period when day care centers are closed or operating under reduced hours. Such circumstances may allow participants to decrease contributions to their FSAs.

Q. Are furloughed employees eligible for unemployment benefits?

A. Most states permit employees to receive unemployment benefits, at least partially, if their work hours are reduced, even if they remain employed. In fact, many states have worksharing programs encouraging employers to reduce employee work hours through a partial furlough instead of layoffs. Ask your professional advisors about your state's rules.

Q. Is it better to furlough or lay off workers during the COVID-19 pandemic?

A. It depends on your organization. But, in general, furloughs may:

Keep workers employed while allowing employers to reduce payroll costs.

Make employees feel valued because they keep their benefits.

Allow employers to respond quickly to new developments by changing work hours or days of work.

Enable employers to quickly resume normal operations after the designated furlough period.

Help employers avoid administrative burdens associated with terminating and rehiring employees, including required legal notices and meeting other federal and state requirements.

On the other hand, layoffs can be more cost-efficient. Employers don't have to keep paying employee benefits and may not be required to pay out accrued (but unused) paid leave. If pay for accrued leave time is required, factor this cost into your equation. And if a collective bargaining agreement is in place, consult your legal advisors.

Q. How do I make this difficult decision?

Before you furlough or lay off your workforce, review all the ramifications with your employment attorney and conduct a thorough cost-benefit analysis. We can help you weigh your options.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.