Employer payment of premiums for current employee's COBRA

[Guest AEA]

HELP!! I have read everything I can find that is remotely related to this situation and have given myself a headache.

Sub-organization of church has a part-time employee who will, effective 9/1, be no longer eligible under the church-sponsored health plan which is changing the definition of eligible employee from 20 hours per week to 30 hours per week. The health plan is offering COBRA to the now ineligible employee. Organization would like to continue paying a portion (80%) of the employee's premiums, which are now COBRA premiums. I believe that this can be done under Code section 106 without being included in the employee's income; I also believe that the employee can keep using the employer's cafeteria plan to pay his portion pre-tax. My question is HOW?

If it will only be for one employee in this one situation, does the employer need a written plan? Can the employer simply keep paying its portion to the insurance company or must it reimburse the employee after he pays? Would it be sufficient for the employer to send the employee a letter outlining his COBRA eligiblity and stating that the employer will continue to pay 80% of the premium either directly to the insurance company or to the employee upon receipt of proof of payment?

WHERE can I find some practical guidance on setting this up??

Thank you in advance!

[401 Chaos]

AEA,

A couple of follow-up questions in response to your post:

1. Are you certain that the plan, as a church-related plan, is subject to COBRA rules. There may be an argument that it is exempt from COBRA although you may still be subject to state continuation coverage rules. You could of course voluntarily provide COBRA benefits but I believe you would want to term it something else if you are exempt.

2. Do you intend to provide employer contributions only for the COBRA period? What happens after 18 months and the individual has to get an individual policy or some other form of coverage. If you intend to limit it to just the COBRA period, you will want to be very clear that employer contributions are in no way intended to alter or extend the maximum COBRA coverage period--i.e., you don't want the employee to say that they should get 18 months of COBRA from the time all employer contributions stop.

3. You can in many cases pay for COBRA premiums through a cafeteria plan providied the covered employee continues working for the employer and is eligible for the cafeteria plan. For example, a full-time employee dropping down to part-time status may lose group health insurance as a result but would still be working for the employer and probably eligible for the cafeteria plan. In that case, COBRA premiums generally could be made under the cafeteria plan. However, if the change in coverage begins 9/1 but the cafeteria plan is on a calendar year, you need to be sure that the change in group health coverage here qualifies as a change in status under the Section 125 ruels and the terms of the cafeteria plan and that the employee makes a new cafeteria plan election.

Both EBIA and Thompson Publishing have helpful COBRA guides that can provide more detailed information on many of these issues.

[QDROphile]

EBIA correctly says that COBRA premiums cannot be paid or reimbursed from an FSA. It may be possible to allow salary reduction under a cafeteria plan to provide for payment of COBRA premiums, but not through the FSA.

A reduction in the employee's hours that causes loss of coverage is a qualifying event for COBRA. Is a change to the health plan to increase the number hours for eligiblity the same thing? If the coverage is provided under an insurance policy, you had better check to make sure the insurance company will provide coverage.

[Guest AEA]

Answers:

No, they aren't subject to COBRA under the letter of the law, but that is the terminology they and their insurance carrier have been using. I have reminded them that they aren't subject to COBRA.

Yes, they are only contemplating 18 months of coverage. The organization wishes to "soften" the blow, not carry the employee forever. They are not real worried about precedent as this is the first time the policy has had an eligibility change - no other eligibility changes are foreseen at the present; and, the employer seemed to feel that they would want to do the same thing in the future anyway.

It was my understanding that they already spoke with the insurance company about continuing this employee, but I will check again.

Question:

With regard to the Health FSA, I could not find anything in the plan document that would prohibit the employee from paying his portion of the premiums pre-tax because he remains an employee. Isn't it generally that COBRA premiums can't be paid through a health FSA because the person is generally not an employee and, thus, not eligible? Am I missing something?

[401 Chaos]

First, special thanks to QDROphile for correcting my past post. I meant to say that COBRA premiums may be paid by a cafeteria plan but my mind was in Health FSA mode. My apologies for the confusion. (I will try and edit my prior message to read correctly).

AEA, I believe the prohibiition on paying COBRA amounts from a Health FSA comes from the Proposed Treasury Regulations under Code Section 125 rather than a specific plan prohibition. Proposed Treas. Reg. § 1.125-2, Q&A-7(b)(4) prohibits a health FSA from reimbursing participants' premium payments for other health coverage. This prohibitiion would generally extend to COBRA and Medicare premiums. I believe this prevents any COBRA payments through the Health FSA regardless of the terms of the employer's particular plan or the employment status of the participant. That said, however, I believe the employer should be able to allow the employee to pay the remaining 20% of the COBRA premiums pre-tax through the cafeteria plan although it make require an amendment specifically allowing the payment of COBRA premiums for continuing employees. Hope that helps.