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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!
When a Prospective Employee Suggests COBRA Coverage
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? What if that prospective employee tells you that you could pay their COBRA premiums and save money compared to your own plan?
While this might sound attractive, it is not nearly as sweet as it seems.
ERISA and COBRA Compliance Issues
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, an employer-sponsored plan is created, and is therefore subject to both ERISA and COBRA regulations.
ERISA Obligations
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.
COBRA Complications
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. But what happens if the COBRA plan terminates because the previous employer goes out of business? Or if the employee leaves your company after 12 months, having already used part of their COBRA eligibility?
In both cases, the current employer may become responsible for providing COBRA coverage to someone who was never truly in their group plan to begin with.
It becomes a sticky mess, indeed!
A Common Severance Practice
On the flip side, what about negotiating an employee’s severance package? Many employers will offer to pay for three, six, or 12 months of COBRA premiums on behalf of the terminated employee.
How to Avoid Costly Mistakes
While this can be done, be careful how you word it in the severance agreement. If you simply promise to pay COBRA premiums for 12 months, you could be responsible for cost increases due to renewals or plan changes.
If instead you are clear in the agreement about the amount you will commit to pay or the level of coverage (platinum, gold, silver, bronze), 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.
©Copyright 2018. Reproduction permitted with attribution to the author.
Ernie Sweat is a Senior Consultant/Producer at Fringe Benefit Analysts (FBA), a company that specializes in employee benefits. With FBA's expertise in compliance and understanding client needs, Ernie Sweat helps people navigate their health, dental, and life insurance options.[...]
