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COBRA, Bankruptcy, and a PEO . . . . Oh My


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So, small client has benefits through a large, national PEO.  Things are not going well for the company and it is facing bankruptcy.  Unclear at present if that will be a Chapter 7 or Chapter 11 and whether some employees will remain on staff to wind things down for a short period, etc. but likely to involve terminating most employees in a few days.  Client asked PEO about COBRA in the event of bankruptcy and was told that "PEO is willing to offer COBRA for a company in bankruptcy if the fees are all paid upfront.  Fees would be $500 per employee as a set up fee (presumably for all current employees whether or not they elect COBRA) and then $75 per month per employee.  All amounts to be paid up front with any unused amounts returned if someone doesn't sign up for COBRA (or takes less than 18 months).  Again, all of this appears to be by way of COBRA / administration fees just to get to point of employee being able to pay regular COBRA premiums.

 

Does this make sense.  I suppose at one level it might be generous if we assume some complete liquidation and this envisions allowing employees to participate in the PEO's multiple employer plan even though client no longer exists and no longer participates in the group health plan.  On the other hand, it seems strange to me for the PEO to be saying it is "willing" to permit COBRA coverage and then to assess some employer administration fees to make that happen.  What if they are trying to reorganize and a handful of employees stay on to help and the company continues the group health plan participation but just for those few employees.  Wouldn't the terminated employees have a legal right to participate in COBRA?

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401 Chase, I had a similar situation 10 years ago and was similarly taken aback. The documents said that the PEO was the employer and had he plan, etc., was the employer...How could they not provide COBRA? How has this not come up in a more pointed way in last 10 years?

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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Thanks, Alonzo and Luke. 

 

Regarding Alonzo's question, we understand the employees are employed in the name of the PEO but still trying to determine how COBRA has been handled in the past--apparently there may be some gaps in their compliance with proper COBRA notices and a number of years when they were below federal COBRA requirement.

Luke, nothing ceases to amaze me with PEOs anymore.  I feel they operate outside the law on a lot of fronts--not above the law but maybe below it!  I've not had this exact situation with the bankruptcy aspect before but recall some other situation where the company was involved in an asset sale and winding down or something similar and there was a willingness to make COBRA available (really they had to it seems) but the way they calculated the rate was very suspicious and just led me to conclude they were really under-pricing group health premiums as part of the regular bundled package prices or were otherwise taking a strange and less than transparent approach in how they set COBRA rates.  I'm with you in wondering why their operations are not under intense regulatory scrutiny.  Or some class action lawsuits.

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Just a follow up on this situation.  We have confirmed that the arrangement here is a true PEO type arrangement with the individuals treated as W-2 employees of the PEO. 

It appears the PEO's proposal assumes a Chapter 7 with the company going away and appears to reflect a willingness by the PEO to provide COBRA continuation coverage under the PEO's plan even though the company has gone away and no longer an active participant in the PEO arrangement.  Presumably the PEO takes the position that they would not be obligated to provide COBRA coverage in a Chapter 7 unless the client organization provides for the $500 per employee set up fee and the $75 monthly administrative fee up front.  I suppose a company might make a reasonable argument for that expense in a bankruptcy context if COBRA were otherwise unavailable.  I wonder, however, what the legal basis for the ability to deny COBRA coverage to the PEO's own employees (co-employees) without added administrative and set up fees.  I assume there is some solid legal basis for this position but it seems troubling to me, particularly where a company on verge of Chapter 7 is required to pay all these up front costs for employees to receive any COBRA.  It's unclear to me whether the employees themselves could pay these added fees rather than the employer in order to receive COBRA coverage.  If that is legally possible for the the PEO to do (which I guess it must be), then I suppose this is all helpful and favorable but, on the other hand, I question why the PEO would do this ever in a COBRA context with the risk of adverse selection.  I assume they must come out ahead financially at this cost level?

Apparently in the normal (non-bankruptcy) context the PEO will provide COBRA coverage without the $500 set up fee but still charge the $75 monthly fee for COBRA participants.  Under the company's regular arrangement with the PEO, they are to pay a $200 monthly fee for each active employee so the $75 monthly fee reflects a reduced charge given that the PEO is no longer receiving the full fee.  This is apparently the same approach the PEO would provide in a Chapter 7.

Just curious if this seems standard or typical and, if so, if anybody is aware of how the PEO legally justifies these additional fees in a Chapter 7 context?  Seems a good argument could be made that the COBRA beneficiaries are the PEO's employees for COBRA purposes, their employment is being terminated so they have a COBRA qualifying event, and the group plan providing coverage (i.e., the PEO multiple employer plan) continues even if the client organization ceases to participate / exist.  Thanks.

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Employees are entitled to COBRA benefits from PEO at 102% of the "cost of coverage". If an employee ends up being charged less than that and gets the coverage, all good. If the fee is more, or the PEO discontinues coverage, that's a COBRA violation unless they discontinue coverage for all their employees.

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Thanks, Alonzo. 

 

Just to be clear, my understanding is the set up fees and monthly fees to be paid by the company here are all in addition to regular COBRA premiums passed on to participants.  I suppose if all COBRA participants in the regular course trigger the $75 monthly fees then maybe that is arguably part of the employer portion of regular coverage costs that arguably could be passed along as part of the employer portion of regular coverage costs but the PEO does not seem to be looking to participants to pay that monthly fee. 

I have a hard time squaring the $500 set up fee, however.  It seems that's only possible under the COBRA rules if the PEO can legally argue that it has no obligation to extend COBRA coverage in cases where the client organization disappears and/or drops participation in the PEO and its group plan.

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11 hours ago, 401 Chaos said:

I suppose a company might make a reasonable argument for that expense in a bankruptcy context if COBRA were otherwise unavailable.  I wonder, however, what the legal basis for the ability to deny COBRA coverage to the PEO's own employees (co-employees) without added administrative and set up fees.

401 Chaos, this is what I thought also many years ago the first time I came across it. Seems inconsistent that they say they are the employer for purpose of plan coverage and COBRA, but only if they are paid. If your the employer, then you have the COBRA obligation. I could be missing something. Surprised this does not come up more frequently or dramatically.

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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