Health Plan Elections Upon Rehire or Return from Leave

Health Plan Elections Upon Rehire or Return from Leave

By Brian Gilmore | Published April 29, 2021

Question: What health plan election change rules apply for a rehire or employee returning from a leave of absence?

Short Answer: Section 125, FMLA, and the ACA have rules governing employee health plan elections upon rehire or return from LOA depending on the type and duration of the leave.

Protected Leave Under FMLA (or State Equivalent): Active Coverage with Reinstatement Rights

Absent an employee election to revoke coverage, employers must maintain group health plan coverage for an employee on FMLA, CFRA, PDL, or other state equivalent leave in the same manner as if the employee were active. Employees remain on active coverage (i.e., not COBRA) during the leave, and the employer cannot require the employee to pay more than the active employee-share of the premium. Employers can generally offer the pre-pay, pay-as-you-go, and/or catch-up payment options.

Upon return from leave, the employer must restore any benefits—without application of any waiting period—that were terminated during the leave (unless otherwise elected by the employee), even if the employee revoked coverage or lost coverage for failure to timely pay during the leave.

For more details, see:

Rehire or Return from Unpaid Leave Within 30 Days: Reinstate Prior Elections Upon Return to Work

The general Section 125 cafeteria plan rules, which govern employee elections to pay the employee-share of the premium on a pre-tax basis, require that employee elections be made prospectively.

The new hire exception provides that elections made within 30 days of the date of hire may be retroactive to the date of hire. Many plans are designed to incorporate this optional provision by permitting new hires to elect within 30 days of hire and retroactively pay the employee-share of the premium on a pre-tax basis.

The Section 125 rules provide that an employer utilizing this provision must reinstate employees to their previous elections for the plan year if they are rehired or return from unpaid leave within 30 days of the date of termination or initiation of the leave.

Note: Even in situations where the plan is not utilizing the 30-day new hire retroactive coverage option, an example in the Section 125 regulations suggests that the same 30-day automatic election reinstatement rule applies where, under the facts and circumstances, a principal purpose of the termination of employment or unpaid leave of absence was to alter the election (with an understanding at the time of the initial event that active employment would be reinstated for this purpose).

Rehire or Return from Unpaid Leave After 30 Days but Within 13 Weeks (Continuing Employee): Offer Opportunity to Re-Enroll by the First Day of the Calendar Month Upon Return to Work

Where the employee’s return to work is after 30 days, the Section 125 automatic election reinstatement rules above do not apply.

However, the ACA employer mandate rules provide that a full-time employee who is rehired or resumes services after an unpaid leave of absence is considered a “continuing employee” if the period in which the employee provided no hours of service is less than 13 consecutive weeks (or 26 consecutive weeks for educational organizations).

Employers subject to the employer mandate (ALEs) must offer health coverage to a returning continuing employee (i.e., returning within 13 consecutive weeks of the most recent hour of service) as of the first day that the employee is credited with an hour of service, or, if later, as soon as administratively practicable.

For this purpose, the rules deem offering coverage to the continuing employee by no later than the first day of the calendar month following the resumption of services to always qualify as soon as administratively practicable.

Employers can choose to offer employees only the option to enroll in the prior coverage elected or (within any limitations imposed by the applicable insurance carriers and/or stop-loss providers) offer employees the option to enroll in a new plan option in the same manner as a new hire.

Note: For employers utilizing the look-back measurement method to determine employees’ full-time status, continuing employees will remain full-time for the entire portion of the stability period in which they are employees if they averaged 30+ hours of service in the prior measurement period.

For more details, see:

Rehire or Return from Unpaid Leave After 13 Weeks (Break in Service): Employee Treated in the Same Manner as a New Hire Upon Return to Work

The general rule is that an employee’s break in service with no hours of service of at least 13 consecutive weeks (26 weeks for an educational organization) permits the employer to treat the returning employee (whether returning from non-protected leave or as a rehire) as a new hire and subject to a new limited non-assessment period.

This means that employers subject to the ACA employer mandate will enjoy a new limited non-assessment period for the returning employee, which generally permits the employer to delay the offer of coverage for a new full-time hire until the first day of the fourth full calendar month of employment.

Such returning employees who experience a break in service of at least 13 consecutive weeks are generally treated as a new hire and subject to the plan’s standard eligibility condition and waiting period prior to being offered the opportunity to elect any plan option in the same manner as a new hire.

Note: Employers that use the rule of parity can also treat as a new hire any employee whose break in service with no hours of service is at least four consecutive weeks.

For more details, see:

Active Coverage Continuation Under Non-Protected Leave Policy: No Ability to Change Elections

Many employers have the policy to continue active coverage for some period for employees on a non-protected leave. Carriers will generally permit extensions of active coverage pursuant to an employer’s leave policy of up to a set timeframe (e.g., up to six months) prior to terminating coverage as a result of the reduction in hours or failure to return from FMLA leave (both a COBRA qualifying event).

In these situations, the employees’ unpaid leaves of absence will not affect their eligibility for active coverage under the plan. Therefore, employees continuing active coverage under a non-protected leave policy will not have the opportunity under Section 125 to change their elections because the change in status has not affected the employee’s eligibility for coverage under the plan.

Summary

The following approaches will apply for most situations:

  1. Return to Active Work Within 30 Days: Returned to prior elections upon re-hire or return from leave.

    • No ability to change elections.

  2. Return to Active Work After 30 Days, Within 13 Weeks (Continuing Employee): Offered the opportunity to re-enroll as soon as administratively practicable (generally by the first of the month following return).

    • Employer can offer the ability to change plan options upon re-reenrollment if permitted by insurance carrier or stop-loss provider.

  3. Return to Active Work After 13 Weeks (Break in Service): Can be treated as a new employee subject to the standard new hire eligibility and waiting period conditions upon re-hire or return from leave.

    • Generally treated as a new hire with all plan options available.

Regulations

Treas. Reg. §1.125-4(c):

(c) Changes in status.

(1) Change in status rule. A cafeteria plan may permit an employee to revoke an election during a period of coverage with respect to a qualified benefits plan (defined in paragraph (i)(8) of this section) to which this paragraph (c) applies and make a new election for the remaining portion of the period (referred to in this section as an election change) if, under the facts and circumstances—
(i) A change in status described in paragraph (c)(2) of this section occurs; and
(ii) The election change satisfies the consistency rule of paragraph (c)(3) of this section.

(2) Change in status events. The following events are changes in status for purposes of this paragraph (c):
… (iii) Employment status. Any of the following events that change the employment status of the employee, the employee’s spouse, or the employee’s dependent: a termination or commencement of employment; a strike or lockout; a commencement of or return from an unpaid leave of absence; and a change in worksite. … (3) Consistency rule.
_(i) Application to accident or health coverage and group-term life insurance. An election change satisfies the requirements of this paragraph (c)(3) with respect to accident or health coverage or group-term life insurance only if the election change is on account of and corresponds with a change in status that affects eligibility for coverage under an employer’s plan.

(4) Examples. The following examples illustrate the application of this paragraph (c):
Example (8).
(i) Before the beginning of the year, Employee H elects to participate in a cafeteria plan maintained by H’s employer, W. However, in order to change the election during the year so as to cancel coverage, and by prior understanding with W, H terminates employment and resumes employment one week later.

(ii) In this Example 8, under the facts and circumstances, a principal purpose of the termination of employment was to alter the election, and reinstatement of employment was understood at the time of termination. Accordingly, H does not have a change in status under paragraph (c)(2)(iii) of this section.

(iii) However, H’s termination of employment would constitute a change in status, permitting a cancellation of coverage during the period of unemployment, if H’s original cafeteria plan election for the period of coverage was reinstated upon resumption of employment…

(4) This document provides numerous examples of various regulations surrounding employee benefits and health coverage which are not repeated here for brevity.