By Eliz­a­beth Kay, Com­pli­ance & Reten­tion Analyst
AEIS Advisors
A UBA Part­ner Firm

CautionHave 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.

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