One of the questions we are often asked by employers is how to collect premium payments from employees who may not receive a paycheck or who have a reduced paycheck because they are not actively at work. These questions arise when employees are on an approved leave of absence or, as is common in the era of COVID-19, when employers place employees on furlough. Employers often look to their premium payment policies under the Family and Medical Leave Act (FMLA) for guidance.
The premium payment options under an unpaid FMLA include paying premiums in advance of the leave, paying premiums during the leave from any compensation received during the leave, making payments on a post-tax basis, and making catch-up contributions upon return. If an employee is on a paid FMLA leave, the premium payments should continue to be paid in the same way they would be paid for any other type of paid leave (presumably through payroll withholding).
These same premium payment options are available during a furlough or approved leave of absence, but not all of the options make sense depending on the circumstance. For example, paying premiums in advance might make sense for an approved leave of absence, but paying premiums in advance rarely works in a furlough situation because the leave must be known and anticipated in advance. Continuing to deduct premium payments from any compensation received may be problematic if there are not enough wages received. However, if a different payment option is used than is used for FMLA leaves, an employer needs to go back and review its FMLA policy as revisions may be necessary since employers may not require more of employees on FMLA leave than those on other forms of unpaid leave.
There are two premium payment options that employers generally employ when a leave is unanticipated and/or uncompensated: paying premiums on a post-tax basis during the leave and making catch-up contributions upon return from leave. Making premium payments on a post-tax basis, while it works for the employer, may not be ideal for employees. This is because post-tax premium payments can increase the employee’s taxable wages and reduce their cash flow. For employees experiencing financial hardship due to reduced hours or wages, making premium payments on a post-tax basis can create additional strain.
Another option to consider is allowing employees to make up missed contributions upon return from leave by reallocating the premium across the remaining pay periods in the taxable year. While this option is most beneficial for employees, it may create additional risk for employers if the employee does not return from the leave or terminates employment and there is not enough payroll to cover missed contributions. Depending on the applicable state’s wage withholding laws, an employer may have the ability to recoup any unpaid premiums from other amounts owed to the employee, but the employer should check with counsel to ensure it is not violating any state laws before doing so.
While there are rarely perfect circumstances and perfect solutions, we hope this information helps you determine the best path forward for your organization.
Please contact your HORAN representative for additional information.