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Payment of Premiums by Employer after COBRA


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If an Employer wants to pay a former employee's health premiums, first COBRA, and then after COBRA ends, whatever it costs for the employee to get health coverage, how are payments of those premiums treated for tax purposes? I know premiums paid for COBRA are nontaxable if the Company pays directly or pays to former employee upon proof of payment to insurance company, but if the Company continues to pay the former employee's premiums after COBRA ended, how is that treated?  Is that income, subject to a 1099 or something like that? 

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ERISAgeek111, here are some thoughts.

First, there is ancient guidance that an employer's payment of premiums for employer's plan (e.g., COBRA) for a former employee is the equivalent of payment for employee, so pre-tax under 106. Would also apply to post-COBRA, if coverage was still under employer's plan.

If plan fully insured, you'll probably need a rider to policy (and probably won't get it) to cover former employee after expiration of COBRA.

If plan self-insured with stop loss, ditto re the stop loss policy, but also if the individual is highly compensated and you don't do this for everyone, then you will have a 105(h) violation and all HCEs will be taxable. For that reason, employers with self-insured plans usually post-tax the premium, with or without taxable gross-up, both during and after COBRA.

If your paying the employee to purchase his/her own coverage post-COBRA or apart from COBRA, whether you pre- or post-tax, you will have the dreaded $100 per day per employee (here, it would just be the one employee, I take it) Section 9831 penalty, because the plan is just the reimbursement promise, which of course does not meet any of the ACA requirements.

Be careful.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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I have another question sort of on this topic and haven't been able to determine the answer...

We want to extend COBRA coverage (not pay any of the premiums) to a former employee's spouse who was incorrectly told she would have 36 months of COBRA but is only qualified for 18 under our self funded plan.  If COBRA ends at 18 months she will have a gap of 13 months until age 65 Medicare qualification.  Our vendor has stated we can authorize an exception to extend COBRA coverage, but they do not state what if any consequences this would trigger.

We have already determined stop loss will not pay for this participant's claims during the extended period. 

We are not paying premiums at any time for this participant. However, claims paid on behalf of the participant would be paid through the self funded plan and company assets.

This former employee may have been HCE as salary exceeded $120k annually for a couple of years.

I would appreciate any thoughts. 

Thank you,

 

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22 minutes ago, BenefitsAnalyst said:

We have already determined stop loss will not pay for this participant's claims during the extended period.

BenefitsAnalyst, I would stop right there. She may qualify for special enrollment coming off COBRA, but even if she does not, it's almost November. Figure out what her coverage would be on the Exchange, recommend that she do that, pay her a lump sum, and have her sign a release.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Thank you, Luke Bailey.

That was also my (and my manager's) first recommendation but our VP was leaning toward this extended COBRA option as our Stop Loss is at $500,000.  We typically have only 1-3 claims a year (for over 10 years) and I think he was hoping to balance those odds with any other issues we might face before he made a final decision. 

Thank you!

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