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Employee Furloughs Can Complicate Benefits Offerings

May 7, 2009
Related Topics: Benefit Design and Communication, Retirement/Pensions, Health and Wellness, Featured Article, Compensation
Employers that furlough employees to avoid layoffs during the recession face several decisions with respect to their benefit plans, observers say.

A growing number of employers already have introduced furloughs or are considering them, observers say. Furloughs can affect health plans, 401(k)s and other benefits.

According to a survey by Watson Wyatt Worldwide released last month, 17 percent of employers have imposed mandatory furloughs and 4 percent plan to do so in the next 12 months.

Gov. Bev Perdue of North Carolina announced last month a flexible furlough program for all state employees, but is working with the state Legislature to ensure no benefits, including health care coverage, are affected, a spokeswoman says.

In addition, General Motors has said it will shut down 13 assembly operations for “multiple down weeks” in a cost-saving effort. Workers will continue to receive health care benefits, a spokesman says.

Furloughs can range from very brief periods, such as a day or two off, to extended periods of time. Particularly for short furloughs—which are more common at least for now—many employers will continue their existing programs.

Furloughs “generally don’t have a material impact on an employer’s benefit plan or their administration, other than questions about whether or not an employee is allowed or entitled to use accrued paid time off for the furlough days,” says Thomas G. Hancuch, an attorney with Vedder Price in Chicago.

For example, a spokesman for Covington, Kentucky-based Ashland says the specialty chemical company will continue to pay health benefits for its salaried employees, most of whom have been required to take two weeks of furlough. Ashland, however, will save funds by not having to match employees’ 401(k) contributions during a furlough, the spokesman says.

Benefit program changes are more likely when furloughs are for more extended periods. Whether these become more common in the future “depends on how quickly the economy rebounds,” says Carol Sladek, a principal in Hewitt Associates’ work/life consulting practice.

There has been greater interest in furloughs recently, says Steve Gross, a worldwide partner with Mercer in Philadelphia, who heads the company’s global rewards consulting business. “In the fall, all the questions [by employers] were severance,” he says. More recently, though, “it’s all about furloughs: ‘What can we do? How should we do it? Should it be mandatory? Should it be voluntary?’ ” he says.

Planning is important, says Frank Morris Jr., an attorney with Epstein Becker & Green in Washington.

“As you’re planning a furlough, review the terms of your benefit plan to see what the implications of a furlough might have on each of the benefit plans, and then potentially structure them in a way that would have the least impact on employees and their continued participation in the plan,” Morris says.

The key issue employers are addressing is, “How do I achieve what I need to achieve in terms of cost savings but, at the same time, protect employees from calamities?” says Robert M. Projansky, a partner with Proskauer Rose.

Employers’ approaches may differ depending on their circumstances, he says. Some hope to achieve the desired savings without cutting benefits, while others “need to save every dollar possible,” so their questions focus on what they may be required to do under the law, Projansky says.

Health insurance is one major area that could be affected. Extended furloughs could put employees below the minimum hours needed to be considered eligible for company-paid health care coverage, Morris says. “Employers have looked at trying to structure their furloughs so as not to impact continued eligibility for health care,” he says.

“It’s fairly common to restrict health and welfare benefits eligibility to regular, full-time employees, and then to define that term, ‘full-time employee,’ as someone who’s regularly scheduled to work at least 30 hours per week to 35 hours per week,” Hancuch says. “If you have a furlough where employees are being forced to work, for example, one day less per week for a period of time,” they may no longer satisfy that requirement. This means employers who want to continue to provide coverage may need to amend their plans, which may require the consent of any insurers that are underwriting the benefits, Hancuch says.

“The other way I’m seeing employers dealing with this issue is by adopting an internal policy or practice, which says, in effect, that furloughed hours will be counted as scheduled hours for purposes of eligibility,” Hancuch says. For example, this could apply when employees are moved indefinitely from a 40-hour week to a 32-hour week, although this is done “usually with the hope that it’ll only be for a couple of months,” he says.

Another approach is through COBRA continuing coverage. Under regulations implementing a recently enacted federal law, employees who are laid off or furloughed from September 1, 2008, through December 31, 2009, are eligible for a 65 percent federal subsidy of their COBRA premiums. As a result, Projansky says employers may allow employees to lose their health coverage, thus permitting them to take advantage of COBRA, which reduces company expenses.

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