Post-Termination Employer Issues and Responsibilities
The discharge of an employee does not necessarily end the employer’s relationship with or obligations to the employee. Benefits provided by the employer as well as benefits mandated by law may cause some continuation of the relationship. Areas in which the former employee may have an ongoing connection to the employer include:
- Severance pay, if paid over a period of time and not as a single lump sum
- COBRA- continuing health care coverage
- Providing a HIPAA certificate of creditable coverage through an employer-sponsored group health plan
- Benefits to be paid through a qualified plan, whether a defined benefit pension plan or a defined contribution plan
Severance
Severance pay is a cash payment often given by employers to employees who have been discharged. Sometimes severance is given in consideration for a release of claims by the employee. Severance is also often given to employees in conjunction with a RIF. There is no federal law mandating severance pay, but employers should consult employment counsel to be certain they do not have other legal obligations to pay severance pay. Employers should note that some severance plans may be considered welfare benefit plans and therefore subject to ERISA. Employers should consult with their employee benefits counsel to determine whether a particular plan is subject to ERISA. For more on employee benefit plans and ERISA, please click here.
Continuation of Health Benefits
The federal COBRA statute requires employers with 20 or more employees who provide group health coverage to their employees to offer employees continued health coverage following termination of their employment and loss of coverage. Employers with fewer than 20 employees may have similar continuation of coverage responsibilities under their state law. For more on continuation of health benefits after termination, please visit the COBRA Section.
Group Health Plans Must Provide Certificates of Creditable Coverage
Under the federal HIPAA statute, group health plans are required to issue a Certificate of Creditable Coverage verifying an insured’s period of coverage. An individual with a Certificate of Creditable Coverage may be able to obtain new group coverage without having coverage for pre-existing conditions excluded. A Certificate must be issued automatically and free of charge when an individual:
- Loses coverage under a plan;
- Becomes entitled to elect COBRA continuation coverage;
- Loses COBRA continuation coverage; or
- Upon request while the individual has health coverage, or within 24 months after their coverage ends.
For more on creditable coverage and HIPAA in general, please visit the HIPAA Section.
Retirement Plans
Distribution to Retirees. When an employee retires, the employee may be eligible to begin receiving distributions from a retirement plan. Generally, persons may not withdraw funds from a qualified plan prior to reaching age 59 ½. Early withdrawals or distributions from a qualified employer-sponsored retirement plan before the age of 59 ½ are subject to a 10% penalty tax.
Rollovers from a 401(k) plan. Today very few employers offer defined benefit plans. Defined contribution plans, like 401(k) plans, are much more common. When an employee leaves an employer, the employee may wish to rollover the employee’s 401(k), 403(b) or similar qualified plan funds to another qualified plan with a new employer or to a self-directed IRA. Employees should consult with their tax advisors regarding the rules governing rollovers.
For more on rollovers, you can view FAQs from the IRS by clicking here.
Additional Information
- DOL Employment Law Guide to Employee Benefits
- Continuation of Health Coverage- COBRA
- FAQs About Portability of Health Coverage and HIPAA
- Rollovers of Retirement Plan Distributions
- Tax on Early Distributions from Retirement Plans