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:

• Health Benefits During a Protected Leave

• Late Health Plan Payments on FMLA Leave

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.

• For more details, see: The 30-Day New Hire Election Period.

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.  In other words, employees do not have the option to change their election upon rehiring within 30 days or returning from unpaid leave within 30 days.

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).  Furthermore, many Section 125 cafeteria plans have this 30-day automatic election reinstatement included in the written plan terms to apply in any return to active work within 30 days situation—which is generally viewed a best practice approach to avoid the potential for this form of abuse.

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:

• Newfront ACA Employer Mandate and ACA Reporting Guide

• Loss of Health Plan Eligibility Caused by Move to Part-Time Work

• Non-Protected Leave Rules Under the ACA Look-Back Measurement Method

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 a coverage for a new full-time hire until he first day of the fourth full calendar month of employment. 

• For more details, see: The ACA First Day of the Fourth Full Calendar Month Rule.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.  Under the rule of parity, a break in service occurs if that period of at least four consecutive weeks with no hours of service is longer than the employee’s immediately preceding period of employment. 

For more details, see:

• Newfront ACA Employer Mandate and ACA Reporting Guide

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:

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

• No ability to change elections.

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.

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.

(iii) Application to other qualified benefits. [Reserved]

(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. A change in status that affects eligibility under an employer’s plan includes a change in status that results in an increase or decrease in the number of an employee’s family members or dependents who may benefit from coverage under the 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 (for example, if W’s cafeteria plan contains a provision requiring an employee who resumes employment within 30 days, without any other intervening event that would permit a change in election, to return to the election in effect prior to termination of employment).

(iv) If, instead, H terminates employment and cancels coverage during a period of unemployment, and then returns to work more than 30 days following termination of employment, the cafeteria plan may permit H the option of returning to the election in effect prior to termination of employment or making a new election under the plan. Alternatively, the cafeteria plan may prohibit H from returning to the plan during that plan year.

Prop. Treas. Reg. Sec. 1.125-2(d):

(d) Optional election for new employees. A cafeteria plan may provide new employees 30 days after their hire date to make elections between cash and qualified benefits. The election is effective as of the employee’s hire date. However, salary reduction amounts used to pay for such an election must be from compensation not yet currently available on the date of the election. The written cafeteria plan must provide that any employee who terminates employment and is rehired within 30 days after terminating employment (or who returns to employment following an unpaid leave of absence of less than 30 days) is not a new employee eligible for the election in this paragraph (d).

Treas. Reg. §1.125-3, Q/A-1:

Q-. 1.  May an employee revoke coverage or cease payment of his or her share of group health plan premiums when taking unpaid FMLA, 29 U.S.C. 2601 et seq., leave?

A-1. Yes. An employer must either allow an employee on unpaid FMLA leave to revoke coverage, or continue coverage but allow the employee to discontinue payment of his or her share of the premium for group health plan coverage (including a health flexible spending arrangement (FSA)) under a cafeteria plan for the period of the FMLA leave. See 29 CFR 825.209(e). FMLA does not require that an employer allow an employee to revoke coverage if the employer pays the employee’s share of premiums. As discussed in Q&A-3, if the employer continues coverage during an FMLA leave, the employer may recover the employee’s share of the premiums when the employee returns to work. FMLA also provides the employee a right to be reinstated in the group health plan coverage (including a health FSA) provided under a cafeteria plan upon returning from FMLA leave if the employee’s group health plan coverage terminated while on FMLA leave (either by revocation or due to nonpayment of premiums). Such an employee is entitled, to the extent required under FMLA, to be reinstated on the same terms as prior to taking FMLA leave (including family or dependent coverage), subject to any changes in benefit levels that may have taken place during the period of FMLA leave as provided in 29 CFR 825.215(d)(1). See 29 CFR 825.209(e) and 825.215(d).

Treas. Reg. §54.4980H-3(c)(4) [Monthly Measurement Method]:

(4) Employees rehired after termination of employment or resuming service after other absence.

(i) Treatment as a new employee after a period of absence for employees of employers other than educational organizations. Except as provided in paragraph (c)(4)(ii) of this section (related to rules for employers that are educational organizations), an employee who resumes providing services to (or is otherwise credited with an hour of service for) an applicable large employer after a period during which the individual was not credited with any hours of service may be treated as having terminated employment and having been rehired, and therefore may be treated as a new employee upon the resumption of services only if the employee did not have an hour of service for the applicable large employer for a period of at least 13 consecutive weeks immediately preceding the resumption of services. The rule set forth in this paragraph (c)(4)(i) applies solely for the purpose of determining whether the employee, upon the resumption of services, is treated as a new employee or as a continuing employee, and does not determine whether the employee is treated as a continuing full-time employee (for example, an employee on leave) or a terminated employee for some or all of the period during which no hours of service are credited.

…

(iv) Treatment of continuing employee. The rule set forth in paragraph (c)(2) of this section applies to an employee treated as a continuing employee in the same way that it applies to an employee who has not experienced a period with no hours of service. A continuing employee treated as a full-time employee is treated as offered coverage upon resumption of services if the employee is offered coverage as of the first day that employee is credited with an hour of service, or, if later, as soon as administratively practicable. For this purpose, offering coverage by no later than the first day of the calendar month following resumption of services is deemed to be as soon as administratively practicable.

Treas. Reg. §54.4980H-3(d)(6) [Look-Back Measurement Method]:

(6) Employees rehired after termination of employment or resuming service after other absence.

(i) Treatment as a new employee after a period of absence for employees of employers other than educational organizations.

(A) In general. The rules in this paragraph (d)(6)(i) apply to employers that are not educational organizations. For rules relating to employers that are educational organizations, see paragraph (d)(6)(ii) of this section. An employee who resumes providing services to (or is otherwise credited with an hour of service for) an applicable large employer that is not an educational organization after a period during which the employee was not credited with any hours of service may be treated as having terminated employment and having been rehired, and therefore may be treated as a new employee upon the resumption of services, only if the employee did not have an hour of service for the applicable large employer for a period of at least 13 consecutive weeks immediately preceding the resumption of services. The rule set forth in this paragraph (d)(6)(i) applies solely for the purpose of determining whether the employee, upon the resumption of services, is treated as a new employee or as a continuing employee, and does not determine whether the employee is treated as a continuing full-time employee or a terminated employee during the period during which no hours of service are credited.

…

(iii) Treatment of continuing employee. Under the look-back measurement method, an employee treated as a continuing employee retains, upon resumption of services, the status that employee had with respect to the application of any stability period (for example, if the continuing employee returns during a stability period in which the employee is treated as a full-time employee, the employee is treated as a full-time employee upon return and through the end of that stability period). For purposes of the preceding sentence, a continuing employee treated as a full-time employee is treated as offered coverage upon resumption of services if the employee is offered coverage as of the first day that employee is credited with an hour of service, or, if later, as soon as administratively practicable. For this purpose, offering coverage by no later than the first day of the calendar month following resumption of services is deemed to be as soon as administratively practicable. If a continuing employee returns during a stability period in which the employee is treated as a full-time employee and the employer previously made the employee an offer of coverage with respect to the entire stability period and the employee declined the offer, the employer will continue to be treated as having offered coverage for that stability period and the employer need not make a new offer of coverage for the remainder of the ongoing stability period due to the employee’s resumption of services.