COBRA Severence and Bancruptcy

[Guest ADP]

How is COBRA effected in this situation? An employee is laid off and is to receive severence starting 1 month after the last day worked. The severence will pick up COBRA coverage for the duration of the severence. Now the company files bankruptcy between the time the employee is laid off and the severence begins. How does this effect the COBRA coverage, if at all?

[jeanine]

Depends on the facts. Chapter 11 or Chapter 7? If Chapter 11 and their is debtor in possession financing and the court OK's payment for health benefits, and severance payments are also approved, then coverage should continue under COBRA. Even if your severance arrangement is not payable you can still continue COBRA by paying the premiums. However, especially if this is a Chapter 7 filing, chances are the plan will cease to exist. If the plan ceases to exist there is no COBRA. COBRA is continuation coverage, there has to be something left to continue.

[Guest ADP]

Wouldn't there be some legal ramification to tell employees they will be offering COBRA (or severence for that matter) and pushing the date back knowing they will be filing Chap 11 so they don't have to pay?

[jeanine]

Bankruptcy laws protect the secured creditors of the bankrupt company. Unsecured creditors and employees (even wages and vacations) come next in line. As unfair as this sounds, this is the way it is. You may want to speak to an employee benefits attorney to see if you have any recourse.