Incenting Terminated Employees Not to Take COBRA

[401 Chaos]

Employer has history of reimbursing some COBRA for terminated employees being provided severance.  Company is concerned about number of individuals on COBRA for general health insurance renewal purposes as well as with possible switch to a PEO with benefits.  Former employees generally have no contractual right to COBRA reimbursement and there is no severance plan or program--the Company has just offered to reimburse some limited COBRA on a discretionary basis with past terminations.  Company would prefer to avoid more COBRA beneficiaries if possible.

Any concern in stopping the old COBRA reimbursement practice (maybe forever, maybe just temporarily) and implementing a new severance arrangement where the amounts provided for COBRA reimbursement are instead provided as special "transition health insurance benefits" (or whatever you want to call them) for use in covering the cost of transition health coverage either through an exchange or COBRA and requiring proof of coverage?  If that is a problem, any issue in simply providing that amount generally earmarked for transition health coverage but paid no matter what--i.e., they get the cash and can spend however they want without being limited to reimbursement.  Employer would not limit ability to elect COBRA and would provide all required COBRA election packages but may highlight the potential benefits of exchange coverage as part of the exit process.  Thanks.

[Brian Gilmore]

I don't see any issue with them stopping the COBRA subsidy practice going forward to new terms.  Those who have been promised a subsidy should receive the promised amount to avoid issues.

As for how to handle COBRA subsidies, lots of employers simply provide a taxable cash payment regardless of the employee's COBRA election.  Aside from the downside of being taxable, this has multiple advantages including avoiding the Section 105(h) nondiscrimination limitations that apply to self-insured plans.  That's basically a standard payment in the amount of the intended COBRA subsidy, which a gross-up if they want to offer it.

• Here's some more discussion of that issue: https://www.newfront.com/blog/cobra-subsidies-reimbursement-2

Here's a quick slide summary:

2024 Newfront COBRA for Employers Guide

[Peter Gulia]

If an employer “as part of the exit process” might “highlight the potential benefits of exchange coverage”, think carefully about how to make the explanations—of both exchange coverage and continuation coverage—accurate, complete, balanced, and fair.

Prepare for a later day when the employer, which likely is its group health plan’s administrator or other fiduciary, would respond to a plaintiff’s assertion that the fiduciary had obedience, loyalty, prudence, and impartiality duties to communicate in the participant’s (the could-be continuee’s) interest.

This is not advice to anyone.