On December 19, 2005, the Department of Labor, Veterans’ Employment and Training Service (“DOL”) issued final regulations that interpret the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended (“USERRA”). These final USERRA regulations are effective January 18, 2006. The final USERRA regulations (“final regulations”) follow the proposed USERRA regulations that were issued on September 20, 2004 (“proposed regulations”), but clarify several issues with regard to both health and pension benefits.
Congress enacted USERRA in order to protect the rights of individuals who voluntarily or involuntarily leave their employment to serve in the uniformed services of the United States, as defined in Section 4303(16) of USERRA (“Uniformed Services”). Under USERRA, employers must provide certain employment and reemployment rights to employees who take a leave of absence in order to perform service in the Uniformed Services (also referred to as “military service”). USERRA also requires that health benefits, pension benefits and other seniority based and nonseniority based benefits and rights be protected for these employees. This article is intended to address the impact of the final regulations on an employer’s obligation to provide certain employee benefits under USERRA. Employers should consult their labor and employment counsel for guidance regarding USERRA’s employment protections.
Definition of Employer
The proposed regulations define “employer” very broadly, stating, “an employer includes any person, institution, organization or other entity that pays salary or wages for work performed or that has control over employment opportunities … including a person, institution, organization or entity to whom the employer has delegated the performance of employment-related responsibilities.” The final regulations follow the proposed regulations’ definition of “employer,” but exempt entities to which the employer has delegated purely ministerial functions. The preamble to the final regulations (“preamble”) further clarifies that the definition of “employer” is meant to be broad enough to apply to insurance companies that administer employers’ life, long-term disability or health plans. Because “employer” is defined in this manner, entities such as insurance companies and third party administrators cannot refuse to modify their policies in order for employers to comply with their obligations under USERRA.
Period of Service and Application for Reemployment
In general, an employee may perform service in the Uniformed Services for a cumulative period of up to five years and still retain reemployment rights with the employer. This five-year period includes only the time the employee actually spends performing military service. It does not include any period of time before an employee actually reports for military service. Nor does it include the period of time an employee is provided between the end of military service and the time the employee must report back to work or apply for reemployment. Military service with any prior employer is not included for calculation of the five-year period.
Depending on length of service, employees will be given from one to ninety days after the end of their period of military service to report back to work or apply for reemployment. However, if the employee is hospitalized for, or convalescing from, an illness or injury incurred or aggravated during military service, he or she may report to or apply for reemployment after recovering from the illness or injury. Except in circumstances beyond the employee’s control, this period must not exceed two years. The preamble clarifies that this two-year period begins on the date of completion of military service.
Health Care Benefits
The final regulations clarify both the health coverage rights of employees who leave for military service and their health coverage reinstatement rights upon reemployment.
USERRA provides that service members who leave work to perform military service have the right to continue their existing employer-sponsored health coverage. Under USERRA, employees who would lose coverage under their employer’s health plan upon leaving for military service are entitled to elect to continue health coverage for themselves and their dependents, for a period of up to 24 months or their period of military service (whichever is shorter). In general, the service member may be charged up to 102% of the full cost of this continuing health coverage under USERRA.
The preamble also clarifies that spouses and dependents of service members do not have a separate right to elect or waive health care continuation coverage under USERRA. Accordingly, if an employee declines or fails to elect USERRA coverage, health care coverage for his or her spouse or dependent would terminate. (The spouse or dependent may be entitled, however, to continue health coverage under COBRA.) USERRA does provide plans with the latitude to establish notice, election and waiver procedures that would allow spouses and dependents independent election rights. However, employers should check with their insurers and stoploss carriers before implementing procedures that go beyond the scope of USERRA.
Returning employees must have their health coverage (and coverage for eligible dependents) reinstated upon reemployment. At the time of reemployment, no exclusion or waiting period may be imposed (except for service-connected illnesses or injuries) where one would not have been imposed if the coverage of the service member had not terminated as a result of service in the Uniformed Services. The employee must not incur any administrative reinstatement costs. The preamble clarifies that employers who use third parties to provide health coverage are obligated to negotiate coverage that is compliant with USERRA.
The final regulations clarify the relationship between USERRA and “cafeteria plans” established under Section 125 of the Internal Revenue Code (“IRC”). The preamble confirms that pre-tax premium plans and health care flexible spending account plans are considered health plans under USERRA. Accordingly, employees who take paid military leave may continue to pay for health coverage on a pre-tax basis. Further, an employee who leaves for military service may elect continuation coverage under a health flexible spending account. The final regulations also clarify that where a cafeteria plan allows a new election either upon leaving employment for military service, or on subsequent reemployment, these elections will not cause the cafeteria plan to violate cafeteria plan “change in status” rules, under Treasury Regulation section 1.125–4.
Dependent and Retiree Continuation Coverage
The preamble clarifies that when a dependent of a covered employee performs military service, the employer is not required to provide health care coverage to the dependent during the period of military service. Similarly, retirees covered by their former employer’s health plan who perform military service are not entitled to USERRA’s health coverage continuation or reinstatement rights. The right to continue health coverage during a period of military service is employment-based. However, it should be noted that dependents and retirees may have certain reinstatement rights under the provisions of the Servicemembers Civil Relief Act.
The final regulations permit an employer to cancel health coverage for an employee and the employee’s dependents if the employee leaves employment for military service without providing advance notice and does not affirmatively elect to continue coverage under USERRA. However, employers must retroactively reinstate health coverage if the employee failed to give advance notice of service because it was impossible (e.g., unavailability of the employer’s representative, deployment on extremely short notice), unreasonable or precluded by military necessity. Health coverage must be reinstated retroactively upon the employee’s election to continue coverage and the employee’s payment of all required premiums. The employee must not incur any administrative reinstatement costs.
Similarly, where an employee leaves employment for military service and provides advance notice of the military service but does not affirmatively elect to continue health coverage, an employer may cancel health coverage for the employee and the employee’s dependents. However, upon the employee’s election, and payment of all required premiums, health coverage must be retroactively reinstated without the imposition of administrative costs. If the employer has reasonable election rules, health coverage must be made retroactive upon the employee’s election to continue coverage and payment of all unpaid amounts due within the periods established by the plan. Alternatively, an employer that has not developed rules regarding the election of USERRA continuation coverage must reinstate health coverage upon the employee’s election and full payment of required premiums at any time within the USERRA period of up to 24 months.
In light of these new rules, plan sponsors should consider adopting reasonable USERRA election and payment procedures. Plans that are subject to COBRA may consider adopting COBRA compliant rules regarding USERRA continuation coverage elections. Before finalizing any rules or procedures, plan sponsors should contact their third party administrator, if any, to confirm that the rules or procedures can be readily administered. These plan-imposed payment procedures must be communicated to plan participants via the plan document and/or summary plan description in order to be enforceable.
Failure to Pay
The final regulations permit a plan to develop reasonable rules allowing termination of health coverage if an employee elects, but does not pay for, USERRA continuation coverage. Where plans are covered by COBRA, it may be reasonable to adopt COBRA rules for payment and termination of coverage due to nonpayment. These plan-imposed payment rules must be communicated to plan participants via the plan document and/or summary plan description in order to be enforceable.
Pension Plan Benefits
USERRA provides that when an employee is absent from his or her job because the employee is performing military service, the employee must be treated upon reemployment as though the absence did not cause the employee to have a break in service with the employer or employers maintaining the pension plan. This “no-break” rule includes the period of time an employee is provided between the end of military service and the time the employee must report back to work or apply for reemployment. It also includes any allowable hospitalization or convalescence time, generally of up to two years. The “no-break” rule applies for purposes of participation, vesting and benefit accrual.
What Plans are Covered?
Plans that are defined under ERISA as “employee pension benefit plans” are subject to USERRA — generally, any private employer defined benefit or defined contribution plans. However, church plans and governmental plans, which are not covered by ERISA, are also subject to USERRA. (The Federal Thrift Savings Plan is not covered under USERRA; benefits under that plan are governed by another federal statute.)
For single employer plans, the employer must fund the plan benefits to which the returning employee is entitled and which are attributable to the period of service. For a defined contribution plan, this may include employer, employee and/or elective deferral make-up contributions that would have been made by the employer, or could have been made by the employee, during the period of service. Neither investment earnings nor losses for the period of service are added to or subtracted from the amount of the contributions, nor is the returning employee entitled to any forfeitures that were allocated while he or she was absent.
Timing of Contributions
Contributions are not required to be made until the employee is reemployed. The proposed regulations provided that employer make-up contributions to a plan to which employee contributions are neither required nor permitted would have to be made no later than thirty days after the date of reemployment, with the proviso that if it were impossible or unreasonable for the employer to satisfy the thirty-day time limit, contributions were to be made as soon as practicable. However, in response to a number of comments arguing that thirty days was not enough time, the final regulations extend the deadline for repayment to the later of:
- ninety days after the date of reemployment; or
- the date plan contributions are normally due for the year in which the military service was performed.
The final regulations retain the “impossible or unreasonable” exception.
For contributory plans to which the returning employee may, but is not required to, make up missed contributions and/or elective deferrals, these make-up contributions must be made during a period starting on the date of reemployment and continuing for up to three times the length of the employee’s immediate past period of military service, up to a maximum of five years. Also, in another important change from the Proposed Regulations, these make-up contributions or deferrals can only be made during this period and while the employee is employed with the post-service employer. This limitation replaced the rule in the proposed regulations that would have permitted former employees to continue to make up missed contributions or deferrals after leaving employment with the post-service employer — a rule that commenters successfully argued would raise issues of compliance with the Internal Revenue Code and would add to a plan’s administrative complexity. Note, however, that if a reemployed employee leaves and then returns again to his or her postservice employer, the employee may resume make-up payments, as long as the statutory make-up period (three times the length of immediate past service, up to five years) has not expired.
Of course, if a returning employee does not make up his or her contributions or elective deferrals to a contributory plan, he or she will not receive the employer match or accrued benefit that is contingent on, or attributable to, employee contributions or deferrals. If the employee makes up some, but not all, of the missed contributions or deferrals, his or her plan benefit may be less than if he or she had made up the full amount; certainly it will be less (disregarding any investment gains) in a 401(k) plan under which employer matching contributions are contingent on employee deferral contributions.
If an employee continued to receive pay from his or her employer while absent on military leave and was permitted to make employee contributions or elective deferrals from that pay, the amount of make-up contributions or elective deferrals the employee can make upon reemployment will be reduced by the amount of contributions or deferrals the employee actually made to the plan during his or her period of service.
In another change from the proposed regulations, repayment of a distribution made to the employee in connection with his or her military service before he or she was reemployed need be permitted only if the distribution made was from a defined benefit plan. In that event, upon reemployment, the employee must be permitted to repay the amount of the distribution (including interest that would have accrued) during a time period beginning on the date of reemployment and continuing for up to three times the length of the employee’s immediate past period of service (not to exceed five years, or such longer time as may be agreed to between the employer and the employee), but only if the employee is employed with the post-service employer during this period.
Since in most instances an employee’s compensation affects or determines the amount of his or her plan contributions or accrued benefit, the USERRA regulations include guidelines for determining the compensation rate to be used for the period of military service. The general rule is that if it is necessary to calculate an employee’s rate of compensation in order to determine benefits, the rate to be used is the rate of pay the employee would have received but for the period of military service. If that rate is not reasonably certain, e.g., where compensation is based on commissions earned, the average rate of compensation during the twelve-month period prior to the period of military service must be used. If the rate of pay is not reasonably certain and the employee worked for fewer than twelve months prior to the period of military service, the average rate for that shorter period is the rate to be used.
Non-Seniority and Seniority Based Rights and Benefits
Non-Seniority Based Rights and Benefits
In general, USERRA provides that where an individual is absent from employment due to military service, he or she is entitled to non-seniority based employment rights and benefits that are available to any other employee having similar seniority, status and pay who is on furlough or leave of absence. For example, if the employer offers continued life insurance coverage, holiday pay or bonuses to its employees on leave of absence, the employer must also offer the service member similar benefits during the time he or she is absent from work due to military service. If the treatment of non-seniority benefits varies according to the type of leave, the service member must be given the most favorable treatment given to employees on any comparable leave. The final regulations seek to clarify what types of leave are considered “comparable” to USERRA military service leave. The final regulations provide that the most significant factor to consider when comparing types of leave is the duration of the leave. Other factors to consider include the purpose of the leave and the ability of the employee to choose when to take the leave. The DOL states that whether the non-military leave is paid or unpaid is not a factor for determining comparability of types of leave.
VACATION. The final regulations provide that accrual of vacation leave is a non-seniority based right and accordingly must be provided to service members if provided to similarly situated employees on comparable leaves.
SICK LEAVE. Under the proposed regulations, the DOL did not consider sick leave comparable to vacation or other such leave and stated that an employee was not entitled to use accrued sick leave solely to continue his or her civilian pay during a period of military service. In the final regulations, the DOL recognized that this restriction is overly broad. The final regulations provide that an employee is not entitled to use sick leave that accrued with the employer during a period of service in the Uniformed Services, unless the employer allows employees to use sick leave for any reason, or allows employees on comparable leaves to use accrued paid sick leave.
WAIVER OF RIGHTS. If an employee provides his or her employer with a written notice stating that he or she does not intend to return to work following military service, the employee will have effectively waived any non-seniority based rights and benefits to which he or she would otherwise have been entitled to during leave.
Seniority Based Rights and Benefits
USERRA provides that a reemployed service member is entitled to seniority and other rights and benefits determined by seniority that the service member had attained as of the date he or she entered military service, together with the additional seniority that the service member would have attained if continuously employed during the period of military service. In making the determination of whether a benefit is “seniority based,” the following three factors should be considered:
- whether the benefit is a reward for length of service rather than a form of short-term compensation;
- whether it is reasonably certain that the service member would have received the benefit if his or her employment had continued; and
- whether it is the employer’s “actual” practice to provide the benefit as a reward for length of service.
In March 2005, the DOL issued regulations that contained a proposed version of the notice that informs employees and employers of their rights, benefits and obligations under USERRA. The final regulations provide a revised version of the model USERRA notice in the form of two model posters that employers may use in order to meet the USERRA notice requirement. One poster is for private sector and state government employers and the other is for federal government employers. The final notice does not vary significantly from the proposed notice but does state that certain types of service in the National Disaster Medical System are also entitled to USERRA protection. This notice must be posted where employee notices are customarily placed or by alternate means, including hand delivery, mail or email. The DOL advises employers to use their best judgment and discretion in determining the means by which to provide notices to employees of their rights under USERRA. These model posters are available at http://www.dol.gov/vets/programs/userra/poster.htm.
USERRA issues specific to multiemployer plans will be discussed in our next issue.