Handling Employee Contributions During Unpaid Leaves of Absence

If the leave of absence is unpaid or not being paid through payroll (e.g. STD or worker’s compensation), it is advisable to have a process for obtaining the employee contribution and to communicate that process accordingly.

An employer can generally offer the following options to an employee to collect employee contributions while the employee is on leave:

• Pre-pay on a pre-tax basis (this cannot be the sole option);
• Pay during the leave on an after-tax basis; or
• Make up contributions on a pre-tax basis upon return from leave.

In practice, pre-payment is often not feasible because employers may not have enough notice before the leave begins. As a result, some employers require employees to make payments while on leave to avoid collection issues later, particularly if the employee is on an extended leave of absence or ultimately does not return to work. Other employers allow employees to catch up on missed contributions upon return from leave, which may allow those contributions to be made on a pre-tax basis.

If the employer determines a policy and communicates it, and the employee fails to make the employee contribution in accordance with the employer’s policy, the employer may terminate coverage, in some cases even retrospectively subject to any carrier restrictions.

FMLA requires that coverage cannot be canceled for nonpayment of premium unless two conditions are met: 1) The employee must be allowed a 30-day grace period from the date the premium is due; and 2) No later than 15 days before the employer intends to cancel the coverage for nonpayment. If coverage is cancelled for nonpayment of premiums during FMLA leave, the coverage must be available for reinstatement when the employee returns to work. While COBRA is generally not available following termination of coverage due to nonpayment, if the employee does not return to work at the end of the FMLA leave, the employee must be offered COBRA, even if the coverage was cancelled for nonpayment of premium.

For non-FMLA leave, employers have more flexibility with payment policies. The employer should still clearly communicate payment expectations, including method, due dates, and any grace periods or notifications that will be made available, but the employer is not specifically required to provide a grace period or notification prior to termination of coverage. That being the case, many employers may choose to follow whatever payment procedures are put in place for FMLA-protected leave for consistency and ease of administration.