COVID-19 and the risk of ACA employer penalties: 3 FAQs

With the current health crisis impacting the economy and workplace, health reform compliance has become even more complicated as penalty risks escalate. Over the past few months, employers have been asking many questions about how workforce fluctuations impact their risk of non-compliance with the Affordable Care Act (ACA) employer responsibilities. This article presents answers to three of the most frequently asked questions we’ve been hearing.

1. Millions of employees have been terminated due to the pandemic. As economic conditions begin to stabilize and employers rehire their displaced workers, how does that break in service impact ACA eligibility measurement?

There are two issues employers need to address as each terminated employee is rehired:
1. Whether the employee was enrolled in your organization’s benefit plan before termination.
Any returning ACA-eligible employee, who previously had been offered and enrolled in coverage before termination, must receive an offer of coverage upon return, and by the first of the following month at the latest.
Most of us understand that “termination” means that an employee’s job has come to an end and an employer is no longer tracking hours or offering benefits to that individual (with the exception of COBRA continuation benefits). If the employee was not actually terminated from employment, (for example, was placed on furlough or leave of absence) the questions and risks for the employer may be different. (See the second question for further discussion on furloughs.)
2. Determination of the employee’s ACA full-time status, which depends upon when they return to work and how the employer counts their worked hours.
Under the look-back method, if an employee returns to work in less than 13 weeks from the termination date (26 weeks for employees in education), they must be treated as an ongoing employee, as if they never left your employment. That is, they must be placed back into the measurement and stability period as if they never left, including the period of time during which they were not an employee and accumulated no hours.

Assuming the returning employee is classified as ACA full-time and had coverage before a break in service, or was eligible to obtain coverage during the break, through open enrollment, then the employer must offer coverage no later than the first day of the calendar month following the employee’s return to work. Failing to offer coverage in that timely manner could result in IRS penalties.

2. Is our organization at risk of penalties if we furloughed employees?

If the workers’ gap in employment has been classified as a furlough, is the furlough paid or unpaid? If it’s paid, little changes in terms of benefits continuation. If the furlough is unpaid, there are potential impacts to benefits and you could face the potential for inadvertently triggering a Penalty B under the ACA law:
  • If you discontinue regular benefits during an unpaid furlough, transitioning employees to COBRA offers could likely cause them to enroll in an exchange plan instead because COBRA plans may be deemed unaffordable. A scenario like this can create B penalty risks for the employer.
  • If you continue contributions to employees’ regular benefits during an unpaid furlough, your health plan coverage rules may require amending. After all, you don’t want to risk a stop-loss claim denial or administrative denial because plan rules did not permit the continuation of benefits.

3. What are the penalty implications with the new COBRA extension?

Terminated employees generally have 60 days to choose COBRA continuation coverage, and then have 45 days to make a premium payment. Under the National Emergency Response Outbreak period, these deadlines have been extended (up to 60 days after the end of the national emergency), meaning laid-off employees could have a long window during which they could ultimately elect COBRA continuation coverage and additional time to make premium payments before an employer may cancel their coverage due to lack of timely payment.
This means that employers must keep the enrollment window open longer and may have employees (or former employees) whom they must keep enrolled in COBRA coverage, even though they may have yet to make payments.
Specifically, under the COBRA provision extension, an individual who was laid off during the Outbreak Period has until 60 days after the end of the Outbreak Period to elect COBRA coverage. Therefore, someone who lost group health plan coverage at the end of March 2020 would have until 60 days after the end of the Outbreak Period to make their COBRA election and another 45 days to make their first COBRA premium payment.
A COBRA qualifying event that opens employers up to potential ACA penalties is a reduction in hours. If an eligible employee measures as full-time in the prior stability period and has a reduction in hours during the measurement period, then the employer should continue to offer the employee benefits coverage during the stability period. If the employer keeps the employees on regular benefits coverage to avoid the risk of B penalties, then the COBRA rules would not apply. If the employer terminates regular benefits and offers COBRA, they risk B penalties.
Yes, the new rules under which we’re working are complex and can be confusing. If you’re puzzling over how to avoid inadvertent non-compliance and associated financial penalties, be sure to turn to a trusted health reform partner that monitors the changing landscape and provides expertise on how to manage it.
Kyle Scott is assistant vice president of compliance at Health e(fx). Kyle is Certified in Healthcare Compliance (CHC), holds a Certified Health Reform Specialist (CHRS) designation, and achieved certificates in Management Information Systems, Health Law, Human Resources Compliance, and Cybersecurity and Privacy Law.