Shifting from Employer-Paid COBRA to Cash to Get Subsidy

[401 Chaos]

As I understand it, former employees who receive a taxable cash payment or "bonus" or "subsidy" from their employers as part of a severance package are generally free to take advantage of the full ARRA COBRA subsidy provided the employer payment can be used for anything (including paying the individual's 35% COBRA portion).

Employer who previously paid first few months of COBRA premiums as a severance benefit is considering switching that practice to instead provide a lump sum unrestricted cash payment to severed employees and then let them apply for and take advantage of the COBRA subsidy provisions. The lump sum cash payment could be used to offset the 35% COBRA premiums the severed employees would be responsible for as part of the COBRA subsidy.

Any words of wisdom, pointers, or issues to consider from those that have already made such a switch?

[401 Chaos]

Given the lack of responses, I thought maybe I should rephrase my question. I have generally understood that having an employer pay severed employees a taxable cash subsidy (even if generally earmarked for use for health or other insurance benefits) would not interfere with the ARRA COBRA subsidy. Am I wrong in that understanding?

If that is correct, it does seem that employers that were willing to pay all or a large portion of a severed employee's COBRA premiums can likely provide the same or greater benefits to many employees by paying a taxable cash amount and having the employees elect to receive the ARRA COBRA subsidy.

A couple of obvious potential problems / concerns with this approach though: (1) because the cash payment presumably cannot be directly tied to election / payment of the 35% COBRA premiums and participants would have to elect to be signed up for COBRA and seek the subsidy on their own, this approach is likely to result in some (perhaps many) employees forgoing COBRA and using the cash for something else, and (2) because not everyone will be eligible for the ARRA COBRA subsidy (e.g., those eligible to elect coverage under a spouse's group health policy), the cash payment may not go as far or provide as much coverage for the non-ARRA subsidy individuals.

[Chaz]

Why do you think that a monthly cash payment can't be contingent on the employee paying for COBRA for that month?

[401 Chaos]

Perhaps it could so long as its taxable but I worry that at some point that looks a lot like employer-paid COBRA which might impact eligibility for (or at least the amount of) the ARRA COBRA subsidy.

[Guest Sieve]

I would agree that if there is a condition that the former employee pay the COBRA premium prior to receiving a monthly separation payment from the employer, then the employer has paid the COBRA premium to the extent of the payment to the employee, and therefore no subsidy would be available with respect to that amount.

[jpod]

I agree with Sieve that this is a great risk, but I have to wonder why the IRS didn't address this in Notice 2009-27. Q&A-22 offers two examples the answers to which are obvious, but does not provide an example like the situation we are discussing here (i.e., taxable, but only for so long as COBRA is in fact elected). IRS seems to be more concerned about whether the employer money is structured as taxable vs. non-taxable, rather than whether it is an end-run around the rule that an employer subsidy will reduce the government's subsidy.

[401 Chaos]

Yes, tis frustrating. I was hoping they might have addressed this informally or orally and I missed it but it would be nice if the written guidance provided some examples of these sorts of situations.

[oriecat]

My HR Dir was just asking me about this yesterday too, so I would also love to know more clearly.