Negotiating over COBRA Coverage -- Use EXTREME CAUTION!
By Elizabeth Kay
Compliance and Retention Analyst for AEIS
A UBA Partner Firm
Have you ever overheard the new employee in the break room, bragging about how good their health insurance was with their previous employer, and how much less expensive it was than the coverage they are currently being offered?
You may think ”If it was so good, then why give it up?” There are always a number of factors that can lead to someone making a job change, but what happens when COBRA becomes a part of the negotiating process when they are working out the terms of employment with the new company?
We know that, as of November 2014, the Department of Labor (DOL) made it very clear that an employer cannot pay the premium for an individual plan of an employee or an employee’s dependents, period. If they do, the employer could pay an excise tax of $100 per day they are out of compliance per employee affected. That could be up to $36,500 for ONE employee, for ONE year!
But what if a prospective employee were coming to work for you, and the plan with their current employer had similar coverage but lower premiums because the employer was a larger company, the employees were in very good health overall and the employer had negotiated very low rates with its carrier as a result, or the employer was based in a different state where health care costs were lower? What if that prospective employee tells you that you could pay their COBRA premiums and pay less premium for them than if they enroll in your plan? Many employers would love to save $500 a month for one employee. But the deal is not nearly as sweet as it sounds, and here’s why.
While it is not illegal for an employer to pay for COBRA premiums, if it is for a group plan and not an individual plan, it can create other problems with regard to ERISA and COBRA compliance.
As soon as an employer pays the premium on a pre-tax basis on behalf of an employee for its company policy or another policy, an employer-sponsored plan is created, and is therefore subject to both ERISA and COBRA regulations.
ERISA requires that the plan sponsor distribute notifications to enrollees of the plan, including a Summary Plan Description, and other documents that contain specific plan details. If the employee’s plan benefits were under another employer’s plan, it may be difficult to get that information and distribute it to your employee.
Federal COBRA regulation requires that the employee have access to the same coverage for up to 18 months after he or she loses eligibility for the plan due to termination of employment, for example. What happens if the COBRA plan terminates because that previous company goes out of business and its group plan dissolves? Now the current employer is obligated to continue the employee’s coverage, perhaps without a means to do so.
Or, what if this employee terminates from your company after 12 months? It now becomes your responsibility to provide the employee with 18 months of COBRA coverage, except the employee has already used a portion of his or her COBRA eligibility while under your employment. Since COBRA is an employer obligation, you could be responsible for providing COBRA coverage to an employee who was never enrolled in your company’s group policy in the first place.
It becomes a sticky mess, indeed!
On the flip side, what about negotiating an employee’s severance package? If an employee is leaving your company and you are putting together a severance package, be careful when including paying for the employee’s COBRA continuation coverage. Many employers will offer to pay for three, six or 12 months of COBRA premiums on behalf of the terminated employee.
While this can be done, be careful how you word it in the severance agreement. Most employer sponsored plans are on a 12 month contract. If you make a very general statement saying you will pay to continue the employee’s COBRA coverage at your expense for 12 months, and your premiums skyrocket at renewal, or if you change carriers, and the terminated employee chooses a more expensive plan with richer benefits, you could be on the hook for the increase in premiums.
If you are clear in the severance agreement about the amount you will commit to pay on the employee’s behalf, or clear about the level of coverage to be provided (platinum, gold, silver, or bronze level plan, for example), then you will be better protected.
If you are paying COBRA premiums on a tax-exempt basis for a current employee, or you are concerned about a severance agreement that you made with a terminated employee, please seek advice from your ERISA or employment law attorney.