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Employment separation marks the end of an employee's tenure, whether voluntary (resignation, retirement) or involuntary (firing, layoff), and includes contract or seasonal terminations. Employers must swiftly handle tasks like finalizing payroll, retrieving company property, transferring duties, and addressing employee benefits.
When employees leave, their benefits typically end, with unused Flexible Spending Account (FSA), dependent care FSA, and Health Reimbursement Arrangement (HRA) balances forfeited after a claim period. Health coverage may continue under COBRA or similar laws, and group life insurance may offer conversion rights. Employers should adopt a standardized offboarding process to manage these benefits effectively.
Key Compliance Tips
Follow the Plan Document’s Eligibility Rules
To comply with ERISA, benefit plans require an official written document detailing benefits and guiding operations. This document often includes descriptions from insurance carriers or third party administrators (TPAs) and a "wrap" document to meet ERISA requirements. It is a fiduciary duty to follow this document in daily operations. Plan documents must specify when coverage ends after eligibility loss, such as employment termination, typically on the termination date or month's end. Employers must notify employees of benefit termination details and inform carriers and TPAs of eligibility changes. For severance, employers might subsidize COBRA coverage for a set period. Extending active health coverage post-termination is complex, requiring plan amendments and insurer approval to avoid liability.
Offer Continuation Coverage
Employees who leave their jobs may continue health coverage under federal or state laws. COBRA, a federal law, applies to health plans of private employers with 20 or more employees, covering various health plans. It mandates up to 18 months of coverage continuation for employees and their families after employment ends. Employers must send a COBRA Election Notice within 44 days of termination. State laws may apply to smaller employers, requiring similar notices.
Inform Employees About Conversion Rights
Employees can convert their group insurance to individual policies post-employment without approval. Conversion rights, often included in group life insurance, have strict deadlines, typically 31 days after termination. Under ERISA, employers must inform employees about these rights and deadlines to avoid liability. Courts have penalized employers for not providing complete information, requiring them to cover lost benefits. To prevent this, employers should review conversion rules and ensure employees receive written notice at termination.
Understand the Rule for FSAs and HRAs
Most health FSAs, dependent care FSAs, and HRAs require employees to forfeit unused balances upon leaving employment, with a run-out period for prior claims. Employers should check plan documents for specific rules. HRAs may allow spending down balances post-termination. Cashing out unused balances is not allowed, as it risks tax advantages. COBRA coverage must be offered unless exceptions apply. Unlike FSAs and HRAs, HSAs are individually owned and unaffected by employment termination.
Offboarding List for Employee Benefits
Here's a streamlined list for managing employee benefits during offboarding. This process varies by employer based on benefit offerings and state compliance requirements. Given the complexities, consulting legal counsel for specific concerns is advised.
- Assess the employee's enrollment in benefit plans (medical, dental, vision, disability, life insurance) to determine coverage termination dates, and ensure this is communicated in writing.
- Notify insurance carriers of the employee's termination date for timely coverage termination. For self-insured benefits, inform the plan's TPA or service provider managing enrollment.
- Send a COBRA Election Notice to the departing employee for health coverage, unless an exception applies.
- For insured benefits, check for state continuation or policy conversion rights. Review policy documents and contact your carrier for details. Ensure these rights and notices are communicated to the employee.
- Review portability features and requirements for voluntary benefits. These benefits, such as critical illness, pet, and long-term care insurance, may be retained when changing jobs if premiums are maintained.
- Check the employee's balance in any health FSA, dependent care FSA, or HRA, and inform them of the claim submission deadline.
- If an employee is part of your retirement plan, explore options for their vested balance. Choices may include cash-out, rollover to an IRA or qualified plan, or retaining funds in the current plan. Consult with your service provider to ensure all options and notices are communicated.
- Share the contact details of the HR representative managing benefits termination and continuation, along with any external providers, like a 401(k) plan provider, they may need to contact.
- Retain all correspondence with departing employees about benefits termination, COBRA, conversion rights, and related topics. Accurate records are crucial for resolving any future benefits disputes.
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Additional Resources
U.S. Department of Labor’s (DOL) COBRA webpage
“Understanding Your Fiduciary Responsibilities Under a Group Health Plan,” a DOL publication
