Employees on long-term disability may remain eligible for insurance

Posted December 1, 2016

By Ed Zalewski, PHR, editor, J. J. Keller & Associates

If an employee is out on short-term disability (STD) or long-term disability (LTD), the individual is not working, but he or she may still have to be credited with hours of service under the Affordable Care Act (ACA). This means that the employee may, in some cases, remains eligible for your group health insurance plan even though the employee hasn’t reported to work for many months.

Large employers already know that full-time employees must be offered coverage, and that the ACA defines “full time” as averaging 30 or more hours of service per week. The term “hours of service” is, however, quite different from “hours of work.”

Hours of service

According to Internal Revenue Bulletin 2014-9, hours of service include paid working time, but also include paid vacation, holidays, and disability pay. For example, an employee who worked 32 hours and used eight hours of vacation would have 40 hours of service. Similarly, an employee receiving STD or LTD payments may be entitled to have that time credited as hours of service.

The IRS Notice 2015-87 plainly states that “periods during which an individual is not performing services but is receiving payments due to short-term disability or long-term disability result in hours of service for any part of the period during which the recipient retains status as an employee of the employer.”

In short, unless the employee has been terminated, the time spent receiving STD or LTD benefits may have to be counted as hours of service. Whether the time must be counted depends on how the insurance premiums were paid.

Premiums paid

Though it may seem odd, an employer is obligated to credit time on STD or LTD as hours of service only if the employer or employee paid the premiums on a pre-tax basis. If the employee paid the premiums using after-tax dollars, any time spent collecting benefits on disability leave would not have to be credited as hours of service.

This distinction is based on whether the benefit payments are taxable income to the employee. If the premiums were paid with pre-tax dollars, the benefit payments are taxable, and the employee must be credited with hours of service (even when he or she is not working).

On the other hand, if the premiums were paid with after-tax dollars, the benefit payments to the person are exempt from income tax, and the time on STD or LTD does not have to be credited as hours of service.

How many hours?

Disability plans typically pay 60 to 70 percent of the employee’s former income, so does this mean the employer may credit only that percentage of the usual hours worked each week?

That option may be tempting, since an employee who normally works 40 hours per week, but receives 65 percent of the usual wages, would have to be credited with only 26 hours per week (or 65 percent of 40 hours). Under this calculation, the employee would not qualify as full time and may become ineligible for group health coverage.

Unfortunately, the Internal Revenue Service has not offered any guidance on this option. An employer would be safe crediting the employee with the usual hours worked each week, and should contact an attorney before reducing the credited hours based on the percentage of disability pay.

Termination

If the employee is terminated, the hours of service issue is moot because terminated employees are no longer eligible for coverage (but could elect COBRA). Whether termination is an option must, of course, be determined on a case-by-case basis, since the employer may be able to provide leave a reasonable accommodation.

Employers that want to avoid counting STD or LTD benefits, as hours of service might consider making employees pay disability insurance premiums with after-tax dollars. This could help alleviate concerns about paying the employer’s share of health plan premiums for a non-working employee. Since the employee would not earn hours of service, he or she should eventually lose full-time status and become ineligible to remain on the plan.

The bottom line is this: If STD or LTD premiums were paid with pre-tax dollars, an employee collecting benefits during leave must be credited with hours of service when determining full-time status for health plan eligibility.

About the author:

Ed Zalewski

Ed Zalewski is a certified Professional in Human Resources and an editor at J. J. Keller & Associates, a nationally recognized compliance resource company that offers products and services to address the range of responsibilities held by human resources and corporate professionals. Zalewski specializes in employment law topics such as the Fair Labor Standards Act, employee benefits, and discrimination and harassment. He is the author of J. J. Keller’s FLSA Essentials guidance manual and BottomLine Benefits & Compensation newsletter. For more information, visit www.jjkeller.com/hr.