UPDATE: Administrative practices of HHS appear to have recently changed and now may allow for a special enrollment on the exchanges if the employer COBRA subsidy ceases, forcing the participant to pay the full COBRA cost. However, New York State’s Marketplace informed Frenkel that they will only consider that to be the case if the employer paid the COBRA coverage directly, NOT if the employer is reimbursing the participant’s payment. Other states have provided conflicting information. Please consult with your compliance resources before crafting any severance arrangements.
Getting terminated is stressful. From the income loss to the career derailment to the loss of medical coverage, employees who are laid off face a variety of challenges that they were not necessarily prepared to handle. Many well-intentioned employers seek to do the right thing, particularly if the reduction was driven by macro conditions and not poor performance by the employee, by providing a comprehensive severance package. One of those benefits, however – namely paying for COBRA continuation – can bring about consequences for the employee that most employers would never anticipate.
The issue is that the individual market has many qualifiers for when people can enroll in coverage. If there isn’t a recent qualifying event individuals must wait until the next open enrollment to purchase coverage (subsidized or otherwise). And although losing a job IS a qualifying event, losing a COBRA subsidy from your former employer IS NOT. Therefore, by paying the individual’s COBRA for a month or two the employer may actually be hurting the terminated employee, as the following month when the COBRA subsidy from the severance is no longer being paid he/she will no longer be able to purchase coverage through the exchange. This would force the member to remain on unsubsidized COBRA for the rest of the year, which is very expensive, or go without protection entirely.
What should an employer do if they want to both provide a health insurance severance and retain the members’ rights to enroll on the exchange when it runs out? Obviously, we are not a law firm and there may not be easy answers, but we do have some possible suggestions:
- Instead of paying for COBRA, simply gross up the severance deal for the anticipated cost of individual coverage
- Keep the terminated employee on active coverage by converting some of the severance into PTO, thereby meeting the terms of the plan document demanding the employee be gainfully employed to be in the eligible class
- Rehire the employee after the COBRA subsidy terminates for a day and then terminate him/her again to create a new qualified event
Each of these suggestions certainly raises a host of political, legal and logistical challenges – employers should be forewarned about the drawbacks of each scenario – but, as life often teaches; doing the “right thing” sometimes has the wrong effect.