HR Hotline

Can Unemployment Benefits Be Waived in a Separation and Release Agreement?

By Mark Soycher
CBIA HR Counsel

Q: We paid a terminated employee several weeks’ severance after he signed a separation and release agreement waiving any and all claims against the company. Before the severance ran out, however, he filed for and was awarded unemployment benefits. Did he violate the release agreement by filing an unemployment claim against our company? And by receiving severance along with unemployment benefits, isn’t he “double dipping”?

A: While a separation and release agreement is effective in foreclosing legal claims against a company, there are limits on the types of claims that can be waived. In particular, state law specifically prohibits waivers of unemployment claims by employees.

Connecticut General Statutes Section 31–272 states, “No agreement by an employee to waive, release, or commute his rights to benefits or any other rights under this chapter shall be valid.”

Some separation and release agreements distinguish among those claims that are being released and those that the separating employee may still pursue. Other agreements express the waiver provision in more global terms. But, the bottom line is that a release agreement cannot override statutory prohibitions against waiving certain rights.

Besides unemployment claims, employees cannot agree to waive state and federal labor law rights to be paid for time worked or receive minimum wage or overtime (unless the work falls within statutory exemptions from minimum wage and overtime).

In addition, final settlements of workers’ compensation rights or claims cannot be agreed to without approval of the Workers’ Compensation Commissioner. And since a worker, including a former employee, may file a workers’ compensation claim up to one year after the date of an injury—and up to three years from the date of the first manifestation of a symptom of an occupational disease—it would be both impractical and impermissible to seek release of such potential work injury claims at the time of separation.

As for your departed employee’s simultaneous receipt of severance and unemployment benefits, he’s not “double dipping.”

Ordinarily if an employee receiving unemployment benefits also receives wages in that same week as a result of new employment, part-time employment, or severance pay (with no strings attached), the weekly unemployment benefit amount is reduced by two-thirds of the amount of wages received.

However, if the severance pay is available only if the worker signs a release agreement “forfeit[ing] a right or claim independently established by statute or common law against the employer as a condition of receiving the payment,” the law ignores the severance, and there is no unemployment benefit reduction or disqualification based on the receipt of severance. In such cases, the severance is considered the payment in exchange for the worker’s promise not to sue the employer, rather than characterized as a form of continuing wages.

Do you have a question related to employment law, wage and hour issues, human resources, or regulatory compliance involving state agencies such as DEEP or DRS? Members can get free information from CBIA’s experts by calling 860.244.1900.

HR Hotline

Can we make payment of wages via direct deposit mandatory?

Q: Can we require that employees be paid via direct deposit, or do we have to offer an actual paycheck as an option?

A: State law specifies that you must have an employee’s consent to pay him or her via direct deposit. But because the language of the statute refers to “employee” authorization, it has been interpreted to require agreement only from a worker who is already employed, meaning that technically you could inform applicants that if they wish to be employed, they must agree to direct deposit. (Admittedly that’s splitting hairs, but that’s what lawyers do.)

In any event, while it is permissible to urge that an applicant or current employee sign up for direct deposit (for example, in the interest of efficiency, security, and lower administrative costs), it’s still advisable to allow those who prefer a live check to be paid that way.

There may be situations where individuals dealing with a domestic dispute, financial trouble, or identify theft don’t want wages deposited directly into their bank accounts. You should avoid getting involved in those kinds of personal issues, other than to respect the individual’s preference and circumstances.

Generally few people will decline direct deposit, but for applicants that do, it would be unfair—and for current employees, illegal—to deny or terminate employment on that basis.

Do you have a question related to employment law, wage and hour issues, human resources, or regulatory compliance involving state agencies such as DEEP or DRS? Members can get free information from CBIA’s experts by calling 860.244.1900.

HR Hotline: When Is 50 Employees Not 50 Employees?

By Mark Soycher
CBIA HR Counsel

Q: Our employee count just exceeded the 50 threshold. Do we now have to offer FMLA leave? And what about Connecticut’s paid sick leave law, which we understand is also triggered by hitting the 50-employee mark?

A: It depends, since each law uses a different formula to get to 50 employees. Under the Federal Family and Medical Leave Act, a business is covered if it employs 50 or more employees during each of 20 or more workweeks in the current or preceding calendar year. Any employee whose name appears on an employer’s payroll will be considered employed each working day of the calendar week and must be counted whether or not any compensation is received for the week.

Employees on paid or unpaid leave, including FMLA leave, leaves of absence, and disciplinary suspension, are counted as long as the employer has a reasonable expectation that the employee will return to active employment. If there is no employer/employee relationship (as when an employee is laid off, whether temporarily or permanently), such an individual is not counted.

Part-time employees, like full-time employees, are considered to be employed each working day of the calendar week as long as they are maintained on the payroll. An employee who does not begin work for an employer until after the first working day of a calendar week, or who terminates employment before the last working day of a calendar week, is not considered employed on each working day of that calendar week.

Once a private employer meets the 50 employees/20 workweeks threshold, the employer remains covered by the law until it reaches a future point where it no longer has employed 50 employees for 20 (nonconsecutive) workweeks in the current and preceding calendar year.

As of Jan. 1, 2012, when Connecticut’s Paid Sick Leave Law took effect, and until Dec. 31, 2014, coverage is determined on January 1 of each year, based on reporting 50 or more employees in any one calendar quarter in the previous year on an employer’s quarterly unemployment reports filed with the Connecticut Department of Labor.

Because this arrangement led to coverage of some employers with significantly fewer than 50 employees over the course of a full year, but which may have temporarily bumped over 50 in one three-month period, a change in the law’s coverage terms was successfully sought by CBIA and others during the 2014 General Assembly session.

As a result, effective Jan. 1, 2015, employers will be subject to the paid sick leave law based on their employee count for the week containing Oct. 1, annually. Connecticut’s FMLA also works this way but is triggered at the 75-employee count.

Keep in mind that the paid sick leave law does not apply to manufacturers, and paid sick leave is required to be provided only to covered service workers as defined in the law. But, beware: The law also contains a provision forbidding temporary October dismissals, layoffs, or transfers in an attempt to duck the law’s application.

Another state law triggered at 50 employees is the Sexual Harassment Prevention training mandate for supervisors. Any employer with 50 or more employees for a minimum of 13 weeks during the period from Oct. 1 through Sept. 30 must provide this training to supervisors within six months of being hired or promoted to supervisor.

To enable you to satisfy this requirement, CBIA offers an in-depth, three-hour sexual harassment prevention training workshop that discusses prevention strategies for a range of inappropriate workplace behaviors, including conduct other than of a sexual nature. To learn more, call 860.244.1900 or email me at mark.soycher@cbia.com.

Do you have a question related to employment law, wage and hour issues, human resources, or regulatory compliance involving state agencies such as DEEP or DRS? Members can get free information from CBIA’s experts by calling 860.244.1900.

HR Hotline: Is Severance Pay Taxable Wages?

By Mark Soycher
CBIA HR Council

Q: We are paying a departing employee severance, and she is insisting that we shouldn’t take out regular payroll taxes. Is severance pay taxable wages?

A: For some time that question was up for grabs, as different courts issued contradictory opinions. That left employers and terminated employees uncertain about their tax obligations where severance packages were offered.

Finally, however, in a unanimous 8–0 decision handed down in March, the U.S. Supreme Court resolved the conflict among the courts. The ruling held that severance payments are taxable wages subject to FICA (Social Security and Medicare) taxes in cases where such payments are made to employees who are involuntarily terminated, the amount of severance varies based on seniority, and eligibility is not linked to the receipt of state unemployment benefits.

Do you have a question related to employment law, wage and hour issues, human resources, or regulatory compliance involving state agencies such as DEEP or DRS? Members can get free information from CBIA’s experts by calling 860.244.1900.

CBIA’s HR Hotline

Does Enlisting Mean Quitting?

By Mark Soycher
CBIA HR Counsel

Q: If an employee resigns to enlist in the military, is that a voluntary quit? Should we issue a pink slip indicating “voluntary leaving”?

A: You should not treat this as a voluntary quit or even an employment separation, and do not give your departing employee an unemployment notice, or “pink slip.” Instead, you should consider the employee on a leave of absence, with reinstatement rights and other employment protections provided in the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). Under this law, an employee may be absent for a cumulative period of up to five years for military service and still retain reemployment rights.

In addition, USERRA protects a reinstated employee against discharge, except for cause, for six months after a military service absence period of one to six months, and for one year after a military service absence of more than six months.

Federal regulations clearly state that an employee leaving a job for military service is not obligated to decide about seeking reemployment until after completing the uniformed service. An employee who gives a written resignation notice stating he or she does not intend to seek reemployment with your company after completing military service may lose certain seniority rights, but only if you can prove that the employee was aware, at the time of resignation, of the specific rights and benefits to be lost.

In any event, a resignation notice and expressed intent not to seek reemployment cannot, under USERRA, be the basis for denying the right to seek reemployment should an employee do an about-face and later seek his or her old job back.

Depending on the duration of military service leave, a returning employee must report back and request reinstatement within certain time periods. For service of one to 30 days, an employee seeking reinstatement must report back to work by the beginning of the first regularly scheduled work period (e.g., shift) that begins on the next calendar day following completion of service, after allowance for safe travel home from the military duty location and an eight-hour rest period.

For a period of 31 to 180 days, a returning employee must submit an application for reemployment no later than 14 days after completing military service. And for service of 181 or more days, the employee must seek reemployment no later than 90 days after completing military service.

In addition to CBIA’s HR Hotline (860.244.1900), another great resource for information about employees and military service is the Employer Support of the Guard and Reserve (ESGR). A U.S. Department of Defense program, ESGR has trained volunteers and staff who provide education and mediation assistance to service members and their civilian employers regarding USERRA rights and responsibilities. ESGR does not have statutory authority to enforce the law but serves as a neutral, free resource to employers and service members.

Q: Do we need to fill out an Immigration Form I-9 for independent contractors or contract workers from a temp agency?

A: Generally you do not have to complete Form I-9 in this case, but as usual, there are some caveats. First, be careful to evaluate whether or not your independent contractor meets the state and federal criteria for contractor status. State and federal labor and tax officials are on the hunt for misclassified contractors who are actually employees, seeking to recover unpaid unemployment, Social Security, and other payroll taxes, as well as ensure that workers are not deprived of protections under the unemployment and workers’ comp systems or overtime provisions, or credit toward retirement under Social Security.

If the workers in question are properly classified as independent contractors, you are not obligated to complete the Form I-9. However, the immigration law also clearly states that you cannot do through a contractor what would be illegal to do directly. That means you cannot engage the services of a contractor or receive services from a temp agency contract worker knowing that the worker is not legally authorized to work under the immigration law.

As a result, it might be prudent to include in your contractor agreement a statement that the person performing the work on a contract basis is eligible to work under U.S. immigration laws. And you should expect to see in a temp agency’s contract terms that all temporary workers have been documented as authorized to work under applicable immigration law.

CBIA Hotline

Keep your firm off the hook

By Mark Soycher
CBIA HR counsel

Q: An employee who is often on the road for our company insists he is using his cell phone legally when driving by holding it below his chin and using the speaker function. We’re not buying it. Who is correct?

A: You are correct to reject his argument, and it’s likely that the police or a judge would do the same. State law says it’s OK to use a phone while driving only if it is done “hands-free,” except to activate or terminate a call. Using the speaker function and moving it away from physical contact with his ear does not give him a get-out-of-jail-free card. The precise placement of the phone is immaterial; your employee is still holding it in his hand—an illegal and dangerous practice.

Research tells us, however, that the real danger lies more in the brain distraction resulting from speaking on the phone while driving, whether hands-free or not. Most people can drive safely with one hand for at least a brief time (and it’s not illegal to do so), but driving with only half your brain is a different story.

Why risk the safety of your employee or others and expose your company to the growing inclination of courts to hold companies liable where an employee is permitted to talk on the phone while driving or even actively or passively encouraged to do so by supervisors?

The solution is easy: Adopt a policy that forbids employees from using any electronic communication devices while driving on company business, including hands-free devices. In addition, prohibit supervisors from conduct that might encourage workers to use their phones while driving. Managers who regularly demand that employees stay in touch while on the road or answer calls immediately—or who themselves use their phones while driving—expose the company and the employee to grave liability.

These issues are a concern regardless of whether an electronic device or the vehicle is company issued or owned, or personally owned and used for work purposes. To stress the point with employees even more strongly, you might consider including in your policy a statement such as, “Employees who are charged with traffic violations resulting from the improper or illegal use of their phone or other electronic device while driving will be solely responsible for all fines and liabilities that result from such actions.”

Such a statement may not completely insulate your company from liability, but it may make an employee think twice before grabbing that call while driving—which could end up costing the offender $125, $250, or $400 for a first, second, and subsequent offense respectively, independent of any other moving violations, criminal charges, and/or civil liability.

Q: When employees retire, are they eligible for unemployment benefits?

A: It depends. If a worker’s retirement reflects a truly voluntary withdrawal from the labor market, he or she may be denied unemployment benefits until returning to work and earning wages equaling 40 times their weekly benefit rate (approximately 20 weeks of work), and the subsequent separation from employment is under qualifying circumstances.

There are, however, situations where a worker’s “retirement” will most likely be judged as involuntary and therefore not disqualify him or her from eligibility for benefits. They include the following:

  • The retirement is induced by the employer in an effort to close a facility or eliminate the worker’s position, or the worker reasonably believes the employment would be severed if he or she rejected the employer’s inducement to retire.
  • The reason for the retirement is that the job has become unsuitable in light of the worker’s physical condition and the degree of risk to health and safety, and the worker has unsuccessfully requested other suitable work from the employer.

Where receipt of a retirement benefit does not disqualify a retired employee from eligibility for unemployment benefits, it may reduce weekly unemployment benefits in an amount equivalent to the prorated weekly amount of any part of a retirement benefit that was contributed by the employer.

For example, a claimant’s weekly unemployment benefit rate will be reduced or offset by 50% of the total amount of weekly Social Security benefits received by the claimant, based on the 50–50 sharing of Social Security taxes that fund this retirement benefit.

In any event, a claimant must still be able, available, and looking for full-time work to be eligible for unemployment compensation benefits.

Do you have a question related to employment law, wage and hour issues, human resources, or regulatory compliance involving state agencies such as DEEP or DRS? Members can get free information from CBIA’s experts by calling 860.244.1900.

Is a ‘Pink Slip’ Necessary?

By Mark Soycher
CBIA HR Counsel

Q: Since an employee who quits a job is not eligible for unemployment benefits, do I have to give him or her a pink slip?

A: Yes, for a number of reasons. First, a state regulation specifically requires that this notice be provided to all departing employees, regardless of the reason: “The unemployment notice shall be completed by the employer and issued to the employee, along with the employee information packet, immediately upon layoff or separation from employment, whatever the cause of such layoff or separation, including a voluntary leaving.”

The purpose of the unemployment notice is to advise the separating employee of his or her rights under state employment law and assist unemployment officials in making a determination of eligibility for unemployment benefits. In addition, the Connecticut Department of Labor has increased pressure on employers to submit required information in an effort to increase administrative efficiency and improve the accuracy of eligibility determinations, which in turn will improve the financial solvency of the state’s unemployment trust fund.

Here is one scenario where providing the notice would be particularly important: An employee resigns from your firm and immediately starts another job, making unemployment benefits irrelevant at that time. After a brief period at the new job, however, your former employee is terminated under qualifying circumstances and files for and is awarded jobless benefits.

Because the unemployment system allocates the tax impact of benefit payments to employers in the first four of the last five completed calendar quarters of a claimant’s past work history, your business is notified of a potential charge. If you can establish that the claimant left your job under disqualifying circumstances, i.e., voluntary quit, you can avoid the charge against your unemployment experience rating. A copy of the unemployment notice, which you issued at the time of the quit (noting it was a voluntary quit) and wisely retained in the employee’s personnel file, will be valuable documentary evidence to aid in avoiding the charge to your tax rate.

Another situation to illustrate the importance of issuing the notice: Ordinarily, an employee ruled eligible for benefits begins receiving benefits the week in which he or she files an initiating claim. An employee who delayed filing for several weeks after separating from a job would not get benefits for the intervening weeks between separating and filing. A claimant who was not given the required unemployment notice, however, may be awarded benefits dating back to the week of separation, on the basis that the failure of the employer to provide the required notice left the employee in the dark about the right to file.

Incidentally, people often wonder why an unemployment notice is called a pink slip. Although the conventional wisdom is that the notice had traditionally been printed on pink paper (hence the term), no verifiable evidence of an actual pink slip has emerged, and the origin of the term remains a mystery.

Today’s unemployment notice is neither pink nor a single “slip.” The required notice actually consists of a set of eight full-size pages. The first page—the proverbial pink slip—is filled out by the employer. The remaining seven pages are informational documents for the employee, intended to facilitate processing a claim and assist in an accurate determination of eligibility.

Q: We are trying to complete the Connecticut Department of Labor annual filing, due April 1 each year, reporting our company’s Family and Medical Leave activity under the state’s FMLA, but we can’t find the form on DOL’s website. What’s up?

You can stop looking. The law was changed last year, and the report is no longer required. Adopted last June, Public Act 13-140 eliminates the annual report employers used to catalog Connecticut FMLA activity from the prior year. Apparently the data were not being used for any particular purpose and so, as part of state government’s effort to eliminate unnecessary mandates, the General Assembly took this one off the books.

Do you have a question related to employment law, wage and hour issues, human resources, or regulatory compliance involving state agencies such as DEEP or DRS? Members can get free information from CBIA’s experts by calling the CBIA Hotline at 860.244.1900.

CBIA Hotline: Can You Ask an Employee for Proof of Same-Sex Marriage?

By Mark Soycher
CBIA HR Counsel

Q: An employee has asked that we enroll his same-sex spouse as his dependent for group medical insurance. Can I ask for a copy of their marriage certificate to verify that they are legally married?

A: You may but should do so only if you ask for similar documentation verifying the legal dependent status of all employees’ spouses upon enrollment. Otherwise you might be accused of differing treatment based on sexual orientation, which has been a form of illegal discrimination in Connecticut for many years.

Same-sex marriage has been legal in Connecticut by court decision since 2008, and by a change in state law in 2009. Unless there is some outward conduct to suspect an employee’s assertion of being married is false, most employers accept an employee’s statement of marital status without challenge.

A more suitable approach to prevent enrolling ineligible individuals for coverage would be to advise all employees seeking to enroll dependents that upon enrollment they will be signing documents attesting to the eligibility of their dependents and that any misrepresentation would result in a denial of coverage—and possibly legal action to recover benefits previously paid to an ineligible individual.

Keep in mind that paying the premium does not guarantee the insurance carrier will provide coverage. Paying benefits hinges on truthful application of individuals for coverage, a representation by the insured that all covered individuals meet the eligibility standards. The last thing anyone wants is to have a claim denied after an expensive medical treatment.

Q: An employee who has worked for us for many years informed me that she changed her name to her unmarried surname last year when she got divorced. Do I need to change the Immigration Form I-9 that has her married last name on it? Also, when checking her Form I-9, I found several other employees’ I-9s that are incomplete because the company’s former HR manager neglected to sign Section 2, the employer certification statement. Do I need to update these I-9s? If so, how?

A: You are not required to update Form I-9 when your employee has a legal change of name. However, it is recommended that you maintain correct information on your I-9s and note any name changes in Section 3, generally used for “reverification and rehires.”

Form I-9 regulations do not require that employees present documentation to show that they have changed their name, but you should take steps to be reasonably assured of your employee’s identity and the accuracy of your employee’s legal name change so that your actions will be properly documented and supported if the government asks to inspect your I-9s.

The issue of not having the employer certification part of Form I-9 (Section 2) properly completed requires careful attention.

You cannot simply sign Section 2 as the current HR manager or on behalf of the former HR manager, since it is an attestation of having reviewed the employee identity and work authorization documents and determined that they “reasonably appear genuine.” Unless you examine the documents yourself, you cannot make that assertion based on the former HR manager’s document review.

Immigration law requires that the person signing Section 2 attesting to the authenticity of the documents must have examined the original documents. You may make copies for your files, but copies are not acceptable when initially completing the I-9.

You should ask the affected employee(s) to complete a new Form I-9 Section 1 and provide you with proper documents for identification and work authorization—either the same or other acceptable documents. After you review them, and assuming you conclude they “reasonably appear genuine,” complete and sign Section 2 on the new I-9 and attach the new Form I-9 to the original incomplete Form I-9 with a note indicating that upon discovery of the incomplete old form, you updated your records with a corrected form. That explanation and documentation should be acceptable in the event your records are audited.

Do you have a question related to employment law, wage and hour issues, human resources, or regulatory compliance involving state agencies such as DEEP or DRS? Members can get free information from CBIA’s experts by calling the CBIA Hotline at 860.244.1900.

CBIA Hotlline: When It Snows and You Close

By Mark Soycher
CBIA HR Counsel

Q: Do we have to pay our employees if inclement weather forces us to close our shop for the day?

A: If you are forced to close for all or part of a workday, hourly and salaried nonexempt employees, i.e., those eligible for overtime pay, need only be paid for time actually worked. Some employers permit nonexempt employees to draw from accrued paid time off benefits, such as personal or vacation time, to maintain their regular wages for such days.

It’s a different story with exempt employees–those not entitled to overtime. To be classified as exempt, an employee’s job responsibilities must meet the executive, administrative or professional duties test, their weekly salary must be at least $475 per week, and their fixed weekly salary must not be subject to reduction because of variations in the quality or quantity of the work performed during any week in which at least some work is performed.

Where an exempt employee is absent from work because the business does not open at all for at least a full day but less than a full week, the employee’s regular weekly salary still must be paid in full. However, the portion of salary attributable to the weather-related closing day or days can be charged against the employee’s accrued paid time off (PTO) benefits. From the labor department’s perspective, that constitutes payment of full salary for the week. If the employee has no accrued PTO benefits, full salary still must be paid, and the weather-closing day’s pay can either be treated as regular wages and simply paid, or it can be recorded as an advance of PTO benefits, and charged against future accruals of PTO.

On the other hand, where the company remains open and the employee chooses not to report for work, such absence is considered an absence for a “personal” reason, and the employee may elect to draw from accrued PTO if permitted under the company’s benefit policies, or the absent employee may have his or her fixed weekly salary reduced in full- day increments without jeopardizing exempt status.

Keep in mind that state and federal law prohibit salary reductions for partial day absences although, as explained above, an employee’s PTO bank can be charged for the salary attributable to a partial day absence.

A word of caution: Given the relative ease of electronically accessing work-related data, records, and processes from remote locations via email, voicemail, and the Web, an exempt employee who chooses to remain at home on a day of inclement weather may not really be absent if some work tasks are performed from home. In such a case, that employee’s weekly salary should be paid in full as regular wages and only charged in part against an accrued PTO benefit to the extent you are able to quantify how much work was performed, and how much time taken off.

CBIA Hotline: ADA vs. OSHA: Which Prevails?

By Mark Soycher
CBIA HR Counsel

Q: A job applicant has experience in a manufacturing environment similar to ours but informed me in the interview that he can no longer wear the steel-toed boots we require for OSHA compliance because of a prior burn to one of his feet. Does the Americans with Disabilities Act (ADA) require an accommodation, waiving the use of steel-toed boots? What about a possible OSHA violation for failure to use necessary personal protective equipment? Could we ask him to sign an agreement stating that if he’s injured because of not wearing protective footwear, the company is not liable?

A: Where a possible disability accommodation interferes with a safety compliance standard, it is likely, but not certain, that the safety standard will take precedence. Inability to use personal protective equipment (PPE) may render the worker “unqualified” for the position and thus outside the protections of the ADA.

But before concluding that the employee is not qualified due to his inability to wear required protective footwear, consider the following: Are steel-toed shoes truly needed, or are you being overprotective in mandating them? Even if you conclude they are needed, does the need extend to all tasks, performed frequently, or is the hazard limited to certain infrequently performed tasks, in which case a qualified worker with a disability could be excused from performing those limited tasks requiring use of PPE? Assuming the use of PPE is required and the job cannot be divided to eliminate the hazard, are there alternate forms of PPE that might provide a suitable level of protection? The employee’s doctor and a safety-shoe vendor may have some suggestions.

Only after that type of analysis can you securely conclude the employee is not qualified because of his inability to wear required protective footwear. Do not ask him to sign any type of document purporting to waive company liability in the event he is injured as a result of not wearing required PPE. It would not be worth the paper it’s written on and would not insulate your company against an OSHA citation or a workers’ comp claim.

Q: We have a non-calendar year Section 125 premium-only plan that renews on July 1, 2014. An employee who declined coverage last year now is asking if he can enroll as of February 1, even though open enrollment is not until June 1, 2014. We’d like to accommodate her request, but we’re concerned that doing so would violate the Section 125 restrictions on changes outside of open enrollment and jeopardize the tax advantaged status of the plan?

A: Timing is everything, and you may be in luck. As part of the ACA rollout and startup of the public exchanges, or marketplaces, the IRS has taken steps to allow greater flexibility for individuals to make changes in salary reduction elections for medical plans provided through Section 125 plans for non-calendar plan years beginning in 2013.

To take advantage of this “transition relief,” described in IRS Notices 2013-42 and 2013-71, you will need to amend your written plan. This will allow employees to make certain changes in salary reduction elections previously prohibited, even if they do not experience any of the enumerated changes in status that trigger the right to change an election in the middle of a plan year under current IRS Section 125 regulations.

Generally, Section 125 cafeteria plan elections must be made before the start of the plan year and are irrevocable during the plan year, with limited exceptions, including certain changes in status. Under existing regulations, the availability of health plan coverage through an ACA insurance exchange beginning with calendar year 2014 does not constitute such a change in status.

Under the IRS transition relief that sidesteps this restriction and would seem to offer the desired option to your employee, an employee who failed to make a salary reduction Section 125 cafeteria plan election during the 2013 open enrollment period is allowed to make a one-time election change after the first of the year starting in 2014. This offers employees the opportunity to enroll in their employer’s non-calendar year plan outside of open enrollment in order to comply with the ACA’s calendar year individual mandate and avoid the penalty for failing to obtain coverage. This should be sufficient to accommodate your employee’s situation and request.

The second transition relief circumstance in which a previously prohibited election change is permitted occurs when an employee who elected coverage under his employer’s Section 125 cafeteria plan is allowed to prospectively revoke or change his or her election once during that plan year. This option reflects the IRS’s concern that an employee’s preferences may change due to the implementation of the ACA, and he or she may wish to explore coverage through a state exchange.

Do you have a question related to employment law, wage and hour issues, human resources, or regulatory compliance involving state agencies such as DEEP or DRS? Members can get free information from CBIA’s experts by calling the CBIA Hotline at 860.244.1900.