February 25, 2025

The answer depends upon whether the employees lost eligibility for the medical, dental, vision, health FSA, and other benefits when they were furloughed, and how long the furlough lasts. Employers should review the terms of the SPD/plan document and cafeteria plan document to ensure that the furloughed employees are actually eligible under the plan terms to continue participating.

First, an employer needs to review the plan’s eligibility terms in the plan document/SPD (aka the wrap document). If the employer has experienced this issue before, then they may have previously put language in their plan documents about continuation of coverage during furloughs or leaves of absence. If there are Service Contract Act (SCA) or Defense Base Act (DBA) contracts in place, employers should review those contracts as well to see if there are any special provisions.

If there are no special terms in the employer’s plan document/SPD, then the employer should review the carriers’ certificates or other carriers’ documents for the plan eligibility terms. They may have a specific number of work hours required to be eligible for the plan (e.g., 30 hours/week). When an employee no longer meets the terms of eligibility, coverage should be terminated, and COBRA should be offered (if applicable).

Importantly, a furlough without a loss of plan eligibility would not be a qualifying event under Section 125. Therefore, employees on furlough who didn’t lose eligibility are not allowed to change their plan election midyear unless they experience a midyear qualifying event.

Medical: Additional Rules

If an employer is an applicable large employer (ALE) who is subject to the ACA employer mandate and if they use the monthly measurement method, then an employee who reduced their work hours to fewer than 30 hours/week or 130 hours/month (e.g., an employee who is furloughed) could be terminated from coverage at the end of the month with COBRA offered for reduction of hours. However, if an employer uses the look-back measurement method and the employee worked at least 30 hours/week on average during the preceding measurement period, then the employee would remain eligible through the end of the stability period regardless of the number of hours they work during a furlough unless the employee experiences an employment status change (e.g., full-time to part-time).

Additionally, for an ALE, if employees return to work after 30 days but before 13 weeks, they would be reinstated to eligibility and would have the right to change elections. If they return beyond 13 weeks, then they could be treated as a new hire and need to meet a new waiting period or start a new measurement period.

Health FSA

A furlough without a loss of health FSA eligibility would not be a qualifying event under Section 125. Therefore, the employees on furlough are not allowed to change the health FSA election amounts midyear unless they experience a midyear qualifying event.

However, if they did lose eligibility, COBRA should be offered for any employee with an underspent balance. If they want coverage for the furlough period, they would have to elect and pay for COBRA. If they return to work in less than 30 days since the date they were furloughed, the employees would be reinstated to their previous elections, including the health FSA. If it’s more than 30 days, then they would be treated like new hires with an opportunity to enroll in the health FSA if they choose.

If the employer does not wish for their employees to lose eligibility while on furlough, the employer should consult with their legal counsel on how to design the continuation of coverage during the employees’ furloughed period because of lack of clear guidance. Some of the approaches may be suspending the FSA, suspending employee FSA contributions but continuing FSA coverage, and the employer paying for the employees’ portion.

Premium Payments During Furloughed Period

For active employees, employees pay for their premium contributions through a paycheck deduction. Employers must consider how employees who are on leave without pay can make premium contributions without a paycheck to deduct from. Generally, the rules for FMLA premium payment can serve as useful guidelines. For instance, the employer may require that employees pay during the furlough period by personal check. The payments may be due per pay period or per month. The employees should be provided with written notice of the payment method, due date, and consequences for nonpayment (termination of coverage). Alternatively, the employer could permit the employee to pay upon return, but this is typically not preferred when the return date is not known.

COBRA

Under COBRA, a reduction in hours that causes an employee to lose eligibility for health coverage is a qualifying event that triggers the right to elect COBRA continuation coverage. Therefore, employers who are subject to COBRA should work with their COBRA vendor to ensure that COBRA election notices are provided timely when a furloughed employee loses plan eligibility.

For additional information regarding midyear election change events, please download a copy of the PPI publication Midyear Election Change Events: A Guide and Matrix for Employers.