Alternatives, Procedures, Disclaimers and Non-Discrimination Testing
Many employers choose to offer severance packages to either ease the transition in an involuntary termination situation or to reward a long-term employee for their valued services. Either way, employer-paid COBRA coverage can be an excellent negotiation point and it can be provided to ex-employees on a tax-free basis. If your company currently offers employer-paid COBRA premiums or is considering offering it in the future, we suggest you review your procedures, agreements and disclosures.
Employees May Have Other/Better Options Available
When an individual loses coverage under your group health plan, they may have health plan options other than COBRA available but those options are usually only available for a limited time after your group coverage ends. If they don’t apply within the first month or so after losing coverage, then they will have to wait months for the next open enrollment period. The following are examples of other coverage options that may be available to the former employee, other than COBRA:
Health Insurance Marketplace The Health Insurance Marketplace – HealthCare.gov – allows a limited time after the loss of group health insurance coverage (generally 30 to 60 days) to elect coverage in that Special Enrollment period. If you enroll during the Special Enrollment period, coverage will become effective as of the first of the following month. Otherwise, you have to wait until something else comes up that qualifies for the special enrollment or the next open enrollment period.
Other Employer Health Plans The requirements to enroll in other employer group health plans will vary greatly. And, to complicate matters, the other plans may not operate on a calendar plan year, and that means that open enrollment options will vary.
Delaying Medicare Enrollment If an employee (or dependent) is eligible for Medicare but choose/chose not enroll when they first became eligible, they may have to wait until the General Enrollment Period (January 1 to March 31) to enroll, their coverage may not start until the following July and they may have to pay higher Medicare premiums because they delayed enrollment.
EXAMPLE: If an employee is being terminated in March of 2017 and you offer 3 months of employer-paid COBRA premiums, April to June 2017. If that individual enrolls in COBRA to take advantage of the employer-paid premiums, they may wait until July to try and enroll in the Health Insurance Market Place only to find that they are not eligible because they missed their enrollment window and may not be eligible until January 1st.
Cost Changes Do Not (Usually) Create Special Enrollment Opportunities
When the employer subsidy of COBRA premiums ends, the former employee is responsible for paying the COBRA premiums. If they fail to pay those premiums, then their COBRA coverage will be terminated. But, the termination of COBRA due to non-payment of premiums will not trigger a special enrollment period.
EXAMPLE: The employee is terminated in September of 2016 and the employer offered six months of employer-paid COBRA premiums, October 2016 to March 2017. Once the employer paid period is up in March, they have to pay the full cost of their COBRA. While the employee may have had other options for coverage when they lost coverage at the end of September, if they remain on COBRA until March, they will have missed the Health Insurance Marketplace open enrollment and possibly other opportunities.
Another consideration is that the ACA regulations include non-discrimination requirements. While the ACA-mandated formal non-discrimination testing has been delayed for fully-insured health plans, that requirement exists and could be implemented at any time.
If your health plan is self-insured, then the non-discrimination requirements are active and you need to track your Employer-Paid COBRA packages for both frequency and dollar value of the offers to ensure that you do not discriminate in favor of Highly Compensated former employees.
If you offer Employer-Paid COBRA as part of your severance packages, we suggest that you review your procedures and your severance agreements. The following are a few items we suggest you review and consider in your disclosures, offer and/or severance agreement:
- The date that their group health coverage will end;
- The date COBRA coverage will become effective, if they elect COBRA continuation coverage;
- That they must formally elect COBRA to have their coverage reinstated and to receive the employer paid COBRA premiums;
- A clear description of the Employer-paid COBRA premiums as well as any requirements that they must meet to receive the Employer-paid COBRA premiums.
- Which benefits will be paid by the employer?
- Will this include the Medical Flex Spending Benefits or Health Reimbursement Arrangement benefits?
- How much and for how long?
- How about the costs of dependents?
- If there is an open enrollment during the period of Employer-paid COBRA premiums, would you pay for any dependents or additional coverage that might be added at open enrollment?
- A notice that the employee should carefully research all of their other health plans options, including Medicare, other employer’s group health plans and the Health Insurance Marketplace. You might always want to advise employees that they should carefully review the eligibility and enrollment requirements, special or late enrollment options, look for any lapse in coverage that may result as well as possible financial penalties for late enrollments before electing COBRA and accepting the employer-paid COBRA premium offer.
Offering soon-to-be former employees employer-paid COBRA premiums can be an excellent tool for smoothing the way in your exit interview process. But, whether the termination is voluntary or involuntary or whether or not you offer a formal severance agreement, the terms and disclaimers should be made clearly and in advance.
We suggest that you review this information with your attorney or legal counsel when setting up your severance agreements and exit-interview materials.
This blog is presented for the consideration of our clients and business associates. It is not intended to be legal, accounting, tax or professional advice. This information is not directed to any specific situation or individual and we do not assume liability for the use of or reliance on this information. FlexToday, Inc. 08-16-2016