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Guest Article

Deloitte logo

(From the August 23, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

USERRA Update: Employment-Related Rights for Called Up Military Reservists and Returning Vets


Since late 2001, the U.S. has had significant numbers of reserve forces and National Guard on active duty. Many of these military forces are now returning to civilian life and seeking to return to their jobs and benefits that are protected under the Uniformed Services Employment and Reemployment Act (USERRA). According to published reports, Senate Minority Leader Thomas Daschle (D-SD) recently has requested Labor Secretary Elaine Chao to begin a formal Labor Department investigation of complaints from returning military forces who say they have lost jobs or benefits after returning.

The DOL notes that a smaller percentage of these returning forces are filing complaints than those returning from the 1992 Operation Desert Storm war against Iraq. According to Frederico Juarbe, Jr., assistant secretary of labor for Veterans' Employment and Training Services, which enforces USERRA, "Notwithstanding the lower rate of complaints, we are concerned about every case that comes to our attention and diligently investigate them to resolve any crises that Reservists and National Guard members experience when returning to their civilian jobs."

Time for a "Refresher Course"

Given current circumstances, an update on USERRA requirements is appropriate. USERRA generally governs issues of those returning from active service, but other federal laws also may apply, and in some states additional requirements also may apply. In general, the USERRA applies to anyone whose job is interrupted for a period of five years or less because that person joins or is called for active duty in the uniformed services. Among other things, USERRA prevents employers from discharging or otherwise discriminating against employees who leave their jobs for military service and requires that such individuals be rehired in most cases, if the individual reports for work within a stated period after completing their military service.

In order to be eligible for USERRA protection, the individual must provide advance written or verbal notice of such service to his or her employer. Individuals lose their USERRA rights and protections if they are dishonorably discharged from military service.

During the individual's absence from employment for purposes of military service, USERRA requires that he or she be deemed by the employer to be on furlough or leave of absence and be entitled to the same rights and benefits as other employees of similar seniority, status, and pay who are on furlough or leave of absence. Special rules regarding reemployment rights, health and pension benefits are discussed in more detail below.

Health Plan Continuation Coverage Requirements

One of the first employment issues these individuals will face may be continued health care coverage. Both COBRA and USERRA provide health care continuation coverage rights to employees (and their dependents) who otherwise would lose their group health coverage as a result of joining the uniformed services or being called for active duty in the military reserves. The USERRA coverage is considered alternative coverage for COBRA purposes, so the coverage periods run concurrently. Although the COBRA and USERRA requirements are similar, they are not identical. The key differences are as follows.

  • COBRA requires employers to provide notice to individuals who are eligible for COBRA continuation coverage; USERRA does not require any such notice.
  • Both COBRA and USERRA permit employers to charge up to 102 percent of the full premium cost for continuation coverage. However, USERRA includes a special rule for individuals who serve in the uniformed services for less than 31 days; in particular, those individuals can only be required to pay the applicable employee share for the continuation coverage.
  • The maximum continuation coverage period under COBRA is 18 months for individuals called for active duty. Under USERRA, the maximum period is the lesser of 18 months or the day after the date the individual fails to apply for or return to a position of employment, as required by USERRA (see requirements under "Reemployment Rights").

COBRA generally applies only to employers with more than 20 employees, whereas USERRA applies to all employers. In cases where both COBRA and USERRA apply (as will almost certainly be true of most Human Capital and Global Employer Rewards clients), employers generally should follow COBRA except when USERRA dictates a better result for the employee.

Although COBRA coverage generally can be terminated once an individual is covered by another group health plan, IRS has taken the position that coverage received by an individual as a result of military service does not count as a "group health plan" for this purpose. See IRS Notice 90-58, Sept. 7, 1990. Thus, even if an individual is receiving military health benefits and enrolls his or her dependents in TRICARE (formerly CHAMPUS), he or she still may maintain continuation coverage for the maximum period.

COBRA and USERRA Continuation Coverage Requirements for Health Accounts

COBRA continuation coverage requirements generally apply to health flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs) (see Notice 2002-45), subject to certain special rules. If an HSA is offered through a section 125 plan, it may be subject to COBRA as well. In general, if the health FSA satisfies certain requirements relating to the type and amount of benefits available to participants, it may limit COBRA continuation coverage to the remainder of a plan year in which a participant experiences a COBRA qualifying event. Additionally, if the maximum benefit available to the participant for the remainder of the plan year in which the qualifying event occurs is less than or equal to the maximum COBRA FSA premium for the same period, the health FSA will not be required to offer COBRA continuation coverage at all. See Treas. Reg. Sec. 54.4980B-2, Q&A 8(b)-(f).

Like COBRA, USERRA continuation coverage rights presumably apply to coverage under FSAs and HRAs. However, it is not clear that health FSAs, HRAs, or HSAs can limit the duration of USERRA continuation coverage rights as they can with COBRA rights. Without specific guidance from IRS on this issue, health FSAs should be careful about limiting the continuation coverage period to less than 18 months for any participant who is eligible for USERRA protection.

Do COBRA/USERRA Continuation Coverage Requirements Apply if the Employee's Dependent Is Called for Active Military Duty?

It is clear that, if employees are called to active military duty, they are eligible to elect COBRA/USERRA continuation coverage for themselves, their spouses and dependents. However, are continuation coverage rights triggered if an employee's dependent is called to active duty and will lose health care coverage as a result? This question may arise if, for example, employers allow their employees to cover their dependents through their group health plan until they reach age 18 or are no longer a full time student, whichever is later.

The key question under COBRA is whether this constitutes a "qualifying event." According to Treasury regulations there are 6 types of "qualifying events," including "a dependent child's ceasing to be a dependent child of a covered employee under the generally applicable requirements of the plan." Treas. Reg. Sec. 54.4980B-4, Q&A 1(b)(5).

Thus, if an individual ceases to be a "dependent" under the terms of a group health plan subject to COBRA because he or she is forced to leave school to serve in the military, a "qualifying event" has occurred and that individual will be eligible for COBRA continuation coverage.

USERRA continuation coverage, on the other hand, apparently would not be available to the dependent under these circumstances. This is so because USERRA continuation coverage applies only if the employee-- not his or her spouse or dependents-- has to be absent from employment as a result of active military duty. See 38 U.S.C. §4317(a)(1).

Cafeteria Plans-- Is a Call to Arms a "Change in Status"?

Another interesting question is whether being called up for active military duty qualifies as a "change in status" under a cafeteria plan. In general, once employees elect to be covered by a cafeteria plan for a specified period, plans must prohibit them from making any mid-year election changes. However, plans may allow certain mid-year election changes for employees who experience a "change in status".

According to applicable regulations, events that may count as a "change in status" include a change in employment status, among other things. See Treas. Reg. Sec. 1.125-4(c)(2).

A change in employment status includes a termination or commencement of employment; a strike or lockout; a commencement of or return from an unpaid leave of absence; and a change in worksite. USERRA section 4316(b)(1)(A) specifies anyone who is absent from employment in order to serve in the uniformed services is "deemed to be on furlough or leave of absence while performing such service." Because the regulations also identify commencement of an unpaid leave of absence as a change in employment status, individuals who leave their jobs to begin active military duty should be treated as having experienced a change in status event for purposes of these rules.

Reinstatement of Health Plan Coverage Upon Reemployment

If an individual's participation in a health plan is terminated by reason of service in the uniformed services, USERRA requires his or her coverage be reinstated upon reemployment without subjecting the individual (including his or her spouse and dependents whose participation also was terminated) to any exclusions or waiting periods that would not have applied if coverage had not been terminated. However, applicable exclusions or waiting periods may be imposed with respect to coverage of any illness or injury incurred or aggravated during service in the uniformed services.

Family and Medical Leave

Entitlement to leave under the Family and Medical Leave Act (FMLA) had been an issue under USERRA. However, under a July 22, 2002 DOL memorandum, signed by the DOL Solicitor, the Assistant Secretary of Veterans' Employment and Training, and the Administrator of the Wage and Hour Division, the DOL takes the position that the months and hours that the employee would have worked, but for his or her military service, should be combined with the months employed and the hours actually worked to meet the 12-months and the 1250 hours of employment required by the FMLA.

Retirement Benefits

Upon reemployment pursuant to USERRA, employers must give individuals credit for their military service for purposes of vesting requirements and accruals under any employer-provided retirement plan, as defined in ERISA section 3(2) and 3(22). Military service may not be treated as a "break in service" for retirement plan purposes.

In the case of defined benefit plans, employers must fund the plan for this credited service without regard to any earnings and forfeitures. In the case of 401(k) plans and other plans in which employee contributions are permitted and/or required, individuals reemployed pursuant to USERRA must be allowed to make catch-up contributions to the plan for a period equal to three times the duration of their military service or five years, whichever is less. The amount of contributions to retirement plans in these cases is based on what the individual's compensation would have been if their employment had not been interrupted for military service or, if that amount cannot be reasonably determined, the individual's average compensation during the year immediately before his or her employment was interrupted. In the case of profit-sharing, courts have held that the plan design will determine the USERRA application to the plan.

USERRA Make Up Contributions, Qualified Plan Limits, and Nondiscrimination Testing

Under USERRA, employers generally must allow employees just returned from military service to make up missed contributions to any 401(k) or other plan in which employee contributions are permitted or required. According to IRC section 414(u)(1)(A) and (B), USERRA make up contributions do not count against the elective deferral limit, the annual addition limit, etc., in the year in which the contributions are made, but instead count in the year to which the contributions relate. Furthermore, USERRA make up contributions cannot cause a plan to fail any of the applicable tax-qualified plan nondiscrimination requirements. See IRC section 414(u)(1)(C).

Special Rules for Plan Loans

Individuals with outstanding plan loans at the time they are called to active military duty may be eligible for temporary relief from their repayment obligations. In particular, IRC section 414(u)(4) provides that a plan sponsor may suspend the affected participant's repayment obligation during any part of his or her military service without violating the 5-year repayment or level amortization requirements of IRC section 72(p), among other things. Note that plan sponsors may provide this type of relief, but are under no obligation to do so.

In addition, in certain cases, those with outstanding plan loans at the time they are activated might be able to compel the plan sponsor to reduce the interest rate to 6 percent for the duration of their military service. This according to the Soldiers' and Sailors' Relief Act of 1940, which generally provides that the interest rate on any debts-- including credit cards, mortgages, etc.-- incurred prior to a person's entry into military service may be reduced to as little as 6 percent annually if the individual can convince a court that his or her ability to service the debt at the original interest rate is "materially affected" by military service. Thus, anyone forced to take a pay cut because he or she has been called for active duty may be able to take advantage of this provision.

Reemployment Rights

In most cases, employers must rehire individuals after a period of military service so long as they provide timely notice of their intent to return. Notice is timely if the individual--

  • in the case of service in the uniformed services of 30 days or less, reports to the employer at the beginning of the first full work day plus 8 hours after completing service;
  • in the case of service in the uniformed services of between 31 and 180 days, submits an application for reemployment with the employer not more than 14 days after completing service;
  • in the case of service in the uniformed services of more than 180 days, submits an application for reemployment with the employer not more than 90 days after completing service.

Individuals who fail to meet these timelines do not automatically lose their USERRA rights, but instead are "subject to the conduct rules, established policy, and general practices of the employer pertaining to explanations and discipline with respect to absence from scheduled work."

In general, with respect to individuals whose period of military service is 90 days or less, the employer must reemploy them in the position they would have been in had their employment not been interrupted or, if they are not qualified to assume that position, in the same job they held just prior to commencement of military service. For those whose military service lasts more than 90 days, the employer generally must reemploy them in the position they would have been in had their employment not been interrupted, or a position of like seniority, status, and pay, if they are qualified. Otherwise, they must be given the same job (or at least a job of like seniority, status, and pay) as they held before their employment was interrupted.

Anyone reemployed pursuant to the USERRA is entitled to the additional seniority and benefits the individual would have attained if he or she had remained continuously employed.

Applying USERRA's Five-Year Rule

USERRA protection generally is available to anyone whose job is interrupted for a period of five years or less because of active military duty. However, as a general rule, any period of mandatory military service does not count against this five-year limit. See 38 U.S.C. §4312(c). Mandatory military service generally includes being called to active duty from the reserves and/or National Guard.

Effect of USERRA on Multiemployer Plans

At the recent ABA Joint Committee on Employee Benefits session with DOL Staff, the participants posed a number of questions regarding the application of USERRA to multiemployer plans. Unfortunately, the DOL representatives at that meeting deferred all those questions to the DOL's Veterans' Employment and Training Service, who did not have time to develop answers prior to the meeting.

DOL Resources

Information on DOL's administration of USERRA can be found at:

www.dol.gov/ebsa/faqs/faq_911_2.html

www.dol.gov/vets/#userra


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879.5608, J. D. Lutz 202.879.5366, Bart Massey 202.220.2104, Diane McGowan 202.220.2077, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5324, Tom Veal 312.946.2595, or Deborah Walker 202.879.4955.

Copyright 2004, Deloitte.


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