Penalty Risk When Dropping Coverage for Unpaid Premiums During Leaves Under the ACA

Lyndsey R. Barnett

As 2016 edges closer, the monthly and lookback measurements are a reality rather than just material for seminars. Even employers who are well educated on the process are likely to have situations come up that they hadn’t thought about how to handle under the ACA. One of these types of situations that we have received some questions on recently is how to handle employees that fail to pay their portion of the premiums while they are on unpaid, non-FMLA leaves of absence.  

An employee who is determined to be a full-time employee during a lookback measurement period is entitled to an offer of coverage for a subsequent stability period (or the employer will be subject to a penalty). Say that same employee elects coverage, promptly gets injured without any accrued paid leave, and has already used all 12 weeks of FMLA leave. To comply with the Americans with Disabilities Act, you and the employee agree that three months of unpaid leave is a reasonable accommodation for the injury. The employee is in a stability period, so despite the reduction in hours for the unpaid leave, you appropriately continue to offer health insurance to avoid ACA penalties.   

Since the employee is not receiving a paycheck, the first step for you is to set up a mechanism for him to pay his portion of the premiums.  In this example, let’s say the procedure is that the employee is to send you a check for the employee portion of the premiums by the 1st of each month. For the first month, all goes according to plan, and you receive the check on time.  However, for the second month, no check arrives. You may have three questions: (1) can I terminate the coverage without exposing myself to potential ACA penalties?; (2) if so, when can I terminate coverage?; and (3) do I need to reinstate coverage if the employee returns to work?  Fortunately, the path to avoiding ACA penalties in this situation should look very familiar for employers subject to COBRA.      

The IRS treats an employer as having made an offer of coverage to a full-time employee if coverage terminates because the employee fails to timely pay the premiums. Effectively, you can terminate the employee’s coverage without fear that the employee will go to the exchanges, receive a subsidy, and trigger the penalties. However, just like COBRA, the IRS treats a premium payment as timely if paid within a 30-day grace period, and it is considered paid on the date the employee mails the check. So, for our scenario above, you may need to hold tight through the beginning of the third month before you verify that premiums will not be timely paid and terminate coverage.   Once you terminate the coverage for failing to pay a premium, you do not have to offer the employee coverage again until the next open enrollment period even if the employee returns to work sooner, and then only if the employee returns to a full-time position or is determined to be a full-time lookback employee despite the time spent on leave.  

Of course, many leave scenarios are not as simple as this one, and the ACA has not made your job any easier. You should always be cautious when managing health insurance for employees on an unpaid leave.If you have any questions about your penalty risk in these unusual situations, we are here to help.