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COBRA Prem from PEO much higher


Guest OfficeDon

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Guest OfficeDon

We are a small company that is part of a very large PEO. We went with them primarily because of the lower medical premium rates. The PEO is partially self funded and partnered with a major Health Insurer. One employee left and their cobra rate quoted was substantially higher than what he was paying, even after adding in the company contribution. Hypothetically, he was paying $350/mo and our company was contributing $200, but his quoted cobra prem is way above $550 - far beyond the 102% allowed (around $1100). I think it has to do with the fact the the PEO is partially self insured as what we pay in medical is referred to an allocation and blended in with the combined rate for taxes, work comp, unemployment, insurance, etc. We are being told that the major Health insurer the PEO is partnered with is offering an equivalent coverage policy for cobra, despite being more expensive. My first reaction was that this in not in compliance with Cobra. Has anyone dealt with this issue before - cobra rates for self funded (or partially self funded) plans? There seems to be some ambiguity in determining the rates, it can't be that far off. Draper vs. Baker Hughes, Inc doesn't address this 100%, but still seems to point to a uniform rate for cobra recipients.

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If the PEO uses a self insured plan that multiple employers (like your company) must adopt., I would think that you have a MEWA, which raises a whole nother set of issues.

While I understand your concern with the COBRA rates, you have a bigger issue that should eventually come back and bite you.

I do not think that it is allowable that the health insurer should be "offering an equivalent coverage policy" , the coverage should be the same as before at the rate of 102%. There might be a leeway where COBRA could be a little more than 102%, but that rate whatever it is should have been disclosed long ago.

If I were you, I would be checking with BOTH you state DOI and the DOL regarding the MEWA arrangement.

I would also check the state insurance law regarding the state version of COBRA and continuation of coverage, especially since you most likely fall under your state small group/employer health insurance laws. By the way, What state are you I?

Hopefully, one of our COBRA experts will see your post and chime in.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest OfficeDon

Thank you for your reply. We are in MN and the PEO is in TX. The PEOs annual report states their Health Insurance is provided with policies with a major national health care provider and based on contractual terms the PEO is treating this as a partially self funded plan. In my online searching I cannot find anything that supports how they can provide cobra coverage rates that is no where near what they are charging us currently for health insurance. I did find some ambiguity in how cobra premiums are to be calculated for self insured plans, but there is such a wide gap, it just doesn't pass the smell test. Also, this is a partially self funded plan, not fully self insured. Thanks again.

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  • 4 weeks later...

I know I am a little late to this posting, but if it is the same large PEO that we used back in 2010 (in TX used to start with an A and now starts with an I), they were never willing to split out the employer portion of the health insurance premiums for us. We just got a total cost of benefits by employee and a bill each month. Where did you get the calculation for $200 employer portion? I have to wonder if that was done incorrectly. That is where I am getting a red-flag, not on the COBRA amount part.

It is my understanding (at least for small group coverage in TX), the insurance provider requires that the employer pay at least 50% of the single employee coverage to be willing to quote coverage -- but maybe it is different with the PEO. So the $200 should have been questioned at the time given if all numbers are for a single employee paying $350 themselves.

And was the $1100 single employee coverage or family? Because in 2010 when we pulled out of that PEO and took HR back in-house, that was the COBRA amount for family coverage (we did have great health insurance benefits under them but they were pricey).

I will say one of the reasons we pulled out of the PEO was often they depend on their client being very un-versed in labor, employment and benefit laws. But in the end the employer bears liability that they think the PEO is covering (just ask the DOL/EBSA). And there is a risk there that I think a lot of their clients don't realize.

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Guest OfficeDon

To clarify:

"Hypothetically, he was paying $350/mo (Family coverage) and our company was contributing $200 (towards employee only coverage), but his quoted cobra prem is way above $550 - far beyond the 102% allowed (around $1100-Family coverage). "

​This was for a HDHP Family plan. And also I finagled the details from the PEO for their allocations for each service (ie taxes, sui, med/dent, etc..), so I could better determine if it was a good financial decision. It appears to me they bundle all the services and "low ball" the medical "allocation" to get new customers and then raise it over time during renewals. So new customers get a really low medical allocation and longer term customers must get a higher allocation.

Thanks again for everyone's response.. more information helps make better decisions..

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We have an HDHP ($5k deductible) and honestly $1100 a month sounds about right for family coverage. I do agree that the PEO could have easily low-balled the medical amount at sign-up to get the business and rolled that cost in elsewhere. I think someone snowed you on the "details from the PEO for their allocation for each service" honestly. (Much like a car salesman who has the ability to shift prices through interest rates, trade-ins etc).

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Guest OfficeDon

I don't think I got "snowed", but rather they low balled medical, and then when they throw someone out you get the going rates. I don't disagree that the rate quoted for cobra is competitive, but what I don't think is right is how they skirt around the cobra regs because this is an "allocation" vs. premium. An ex employee ends up paying about double of what the company paid as the "total cost" for medical.

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  • 4 weeks later...
Guest Nate Ogden - OBA

I recently sold my TPA to a PEO, very familiar with COBRA and the games PEOs play. I would be more shocked to find out they are doing it correctly then to find out they are way off base.

In regards to how COBRA rates are calcualted the law is actually very clear, the vast majority of plans just choose to ignore it. Self funded plans must annually have a acturial calcualtion of COBRA rates. No grey area thats settled case law. What is most common is for plans to take their maximum liabiity and add 2%, this is illegal as 90+% of plans don't hit their max and you are thus overcharging COBRA eligibiles.

Your specific implication is much harder. The type of relationship you have with your PEO is very impotant, co-employer or staffing model. If the employee is 100% their employee then its their problem and not a lot you can do. If your co-employer I don't see how they can be self funded unless the stop loss policy was issued to just your plan and covered just your employees, otherwise its a MEWA and I'm 99% sure your state doesn't allow those. If you are co-employer then your the one with the potential of getting fined for improoper COBRA admin. As a co-sponsor of the plan you have every right to see the COBRA calcualtions. If they refuse to supply you with these then you need to look for another PEO.

You should also use this opportunity to evaluate the larger picture. If COBRA rates are actually twice as high as your paying who is taking all that extra risk? If these are your employees and they have a bad claims year your liable for their claims up to the stop loss point. Based on these COBRA rates it sounds like your stop loss rate is twice what your actually paying, meaning in reality you have twice the exposure you thought you did. Unless your PEO has an insurance carrier license and you have a policy with that company they aren't taking that risk for you. As far as any court is concerned you would be liable. COBRA rates not matching what your being charged and not being provided clear copies of everything should be a HUGE red flag.

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