The Benefits of Sabbaticals: Attracting and Retaining Employees

The latest idea for attracting and retaining employees in this post-COVID-19–pandemic era of the Great Resignation and “quiet quitting” is one that was usually limited to professors in higher education: the sabbatical.

The sabbatical is a perk that companies of all sizes are increasingly rolling out in an effort to enhance their total rewards program. Who wouldn’t want to take time off to travel, engage in professional development, or write a book? Many employers are exploring this idea as a way to keep valued employees or provide a phased route toward retirement. Whether the goal is improving retention, increasing loyalty, reducing burnout, or facilitating increased work-life balance, a sabbatical may be a welcome new offering for employees. As employers consider how to design the sabbatical program to best achieve their goals, here are some potential employee benefits landmines to anticipate and avoid.

When considering a sabbatical program, there are a number of mechanical aspects to consider: Who will be eligible? How long must they have worked with the employer to become eligible? How long can they take off? Will the leave be paid or unpaid? Will they continue to be eligible for benefits? Some employees may be comfortable taking a sabbatical that is unpaid or at reduced pay, but will they want to give up all employee benefits? What are the expectations for returning to work? If an employee does not return, or returns for only a short period of time, what are the consequences, if any? For what purposes may the sabbatical be used?

While there are some statistics available, historically, most sabbatical programs were available to university professors, so data relevant to an employer’s workforce and industry may not exist. For example, an employer may deliberate over whether to provide a one-month sabbatical after five years of service, or a six-month sabbatical after seven years of service. The answer to which criteria to use will turn on an employer’s goals, i.e., what does it take to achieve the incentive and other outcomes that the employer has? It will also depend upon the employer’s ability to backfill the employee’s position while out on sabbatical. Is there another employee who can fill in for the employee or is there someone who is being trained to take over that employee’s position in the future who might be a good candidate to use this opportunity to begin the learning process or initiate relationships with clients or customers?

Beyond design and planning, from a legal perspective, there are several additional features of sabbatical programs employers may want to consider.

Eligibility and Service Credits

Many benefit plans have eligibility based upon full-time employment status and have waiting periods and other benefits that are calculated based upon periods of service, and often based upon periods of continuous service. Employers will want to survey the provisions of their plans and consider how time off on a sabbatical will be counted for each of these purposes. Presumably, employers will not want employees on sabbatical to lose out on service for purposes of calculating a pension, determining vesting, earning credit toward eligibility for retiree medical insurance, determining a severance benefit, or other mathematical calculations that depend upon the length of employment. For example, in a 401(k) plan with a last day of the plan year allocation requirement for a company contribution, employees will want to know whether the contribution will be made if they are on sabbatical on the last day of the year. The governing benefit plan documents are unlikely to have addressed sabbaticals, so are probably silent on this issue.

Ongoing Health Benefits

Since the Affordable Care Act became effective, most employer group health plans have required employees to work an average of at least thirty hours per week to be eligible for health benefits. Eligibility policies often address ongoing eligibility during leaves of absence, but a sabbatical may not fit neatly into the typical leaves of absence criteria. Employers will need to decide whether to continue to treat an employee on a sabbatical as a full-time employee for purposes of eligibility for benefits, including medical, dental, vision, prescription drugs, and other health benefits.

Depending on the answer, employers may need to revise the eligibility criteria in their benefit plans, enrollment materials, summary plan descriptions, eligibility policies, and insurance contracts for consistency with that decision. If an employer has a self-funded plan that is reinsured through a stop-loss policy, an eligibility change may need the approval of the insurance carrier. If an employer decides not to continue this eligibility for benefits coverage during a sabbatical, the loss of health coverage due to a reduction in hours is a qualifying event under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), allowing the employee and other covered family members to continue health benefits at their own cost. If the employer decides to either continue the coverage or make medical, dental, and/or vision coverage available during the sabbatical at the active employee premium rates, it may want to consider having the continued coverage during the sabbatical run concurrent with and be counted toward available COBRA coverage.

Access to Wellness Programs and On-Site Clinics

Employees on sabbatical may well want to continue accessing their employers’ on-site clinics and wellness programs in order to earn any premium discounts and otherwise take advantage of preventive care and other health initiatives. Employers may want to factor in these programs when considering an employee’s status.

Continuity of Life and Disability Insurance

Most group life and disability insurance benefits require full-time active employment status to maintain coverage and provide a benefit based upon salary. In light of these requirements, employers likely will want to confirm that an employee on sabbatical remains eligible for group life coverage and disability coverage. Employees who lose coverage may be entitled to a conversion right to transition to an individual insurance policy where available. Even if the coverage continues, if the sabbatical is unpaid, employers may want to think about how that may impact the value of the life insurance or the disability coverage available. Group life insurance benefits are often a multiple of salary, and group disability benefits are often a percentage of salary. An unpaid leave can impact the amount of those benefits. Also, employers may want to consider how sabbaticants will be treated when they return to work—will they be immediately eligible to resume their insured benefits or subject to a waiting period? Lastly, employers may want to remind employees to factor in the potential impact on any voluntary life insurance or dependent life insurance coverage as well.

Distribution of 401(k) Benefits

If the sabbatical is unpaid, the employee may be looking for other sources of income during the sabbatical period and taking funds out of their 401(k) account may be attractive for some people. It is unlikely that the Internal Revenue Service (IRS) would view a sabbatical as a termination of employment that triggers a right to commence a retirement benefit, because employees who are on sabbatical intend to return to work. That does not mean that there is no opportunity to access retirement benefits, as many 401(k) plans permit in-service withdrawals of certain accounts and others permit plan loans. In addition to reviewing the 401(k) plan’s distribution rules, employers may consider discussing with employees the tax consequences of accessing retirement benefits, particularly if the employee is under age fifty-nine and one-half when an additional 10 percent penalty tax applies to most nonhardship distributions.

Early Pension Commencement

Traditional pension benefits can be more difficult to commence prior to retirement, but some plans permit an employee to begin receipt of a pension during “phased retirement.” Applicable rules may also be useful in a sabbatical situation. The IRS allows a qualified pension plan to permit use of age sixty-two for early retirement. Adding this type of provision to a pension plan could permit a “phased retirement” distribution (or earlier if there is a typical retirement age in a particular employer’s industry.) The their plan rehire provisions may also come into play, as it will be important for employees to understand not only the consequences of taking a pension distribution during a sabbatical but the long-term impact that may have on their pension benefits. If an employer’s traditional pension plan requires an employee to work 1,000 hours per year to continue accruing service toward the pension, it will be important toconsider whether hours on a sabbatical will count toward that limit. An unpaid sabbatical during the later years of employment could adversely impact the monthly pension benefit payable under a formula that is based upon the employee’s final average compensation.

Payment of Deferred Compensation

As noted above, a leave of absence to take a paid or unpaid sabbatical is unlikely to be deemed a termination of employment or severance from service in the eyes of the IRS. Therefore, employers may want to carefully consider any employee’s request to access nonqualified deferred compensation amounts that are due to be distributed once employment ends. A premature determination that a sabbatical constitutes a valid payment event for a nonqualified deferred compensation program can violate the plan terms and trigger adverse tax consequences for the employee under Internal Revenue Code Section 409A.

Final Thoughts

Employers considering offering sabbatical programs may want to confirm that any insurance carriers are on board with increased eligibility for benefits. Employers may want to confirm with their accountants that the projected costs of sabbaticals are properly accounted for. Lastly, employers may want to clarify whether any state laws will treat a sabbatical as earned and deferred vacation time that may need to be paid out if the employee terminates employment prior to taking the leave.