If an Employer Subsidizes Health Plan Coverage for Terminated Employees Under a Severance Plan, Does the Period of Subsidized Coverage Count as COBRA Coverage?
From the May 23, 2013 EBIA Weekly
QUESTION: We are designing a severance plan for an upcoming reduction in force. Coverage under our health insurance plan normally ends upon termination of employment, but the company wants to pay for the first six months of COBRA premiums for employees who terminate due to the reduction in force. If we do that, will a terminated employee who is normally eligible for 18 months of COBRA have only 12 months of COBRA left when the subsidy ends?
ANSWER: Yes—but only if coverage during the six-month period is treated as COBRA coverage in all respects. If your company does not wish to extend the maximum COBRA continuation period, health plan and severance plan documents, election notices, and other materials must accurately and consistently disclose that the company will simply be paying part of the cost of the terminated employees’ COBRA coverage. For example, the severance plan materials should state that coverage during the six-month subsidy period is not automatic and is available only to those who make a timely COBRA election. The materials should also explain that, after the six-month subsidized period of COBRA coverage, the required payments for COBRA coverage will increase to the full COBRA premium amount.
In addition, the company must administer the subsidized coverage as COBRA coverage. This means, for example, that the plan should provide subsidized coverage after the employment termination date only to qualified beneficiaries who are eligible for the subsidy and who elect COBRA on a timely basis. In addition, you should provide election notices to the terminated employees (and their spouses and dependent children) at the same time that you normally would for a termination of employment. Your COBRA election notice forms likely contain blanks that must be filled in with information such as the date that regular plan coverage will terminate, the deadline for electing COBRA, and the date that COBRA coverage will start. Be sure to fill in these blanks with the same dates that you would use if there were no subsidized coverage (in other words, focus on when plan coverage is lost as a result of termination of employment and not on when the subsidy will end). The election notice should also emphasize that COBRA coverage is not automatic and that plan coverage will end when employment terminates unless the qualified beneficiary elects COBRA during the election period.
Conversely, if you want to have coverage provided under the severance arrangement extend the terminated employee’s maximum coverage period, you will want to first negotiate those terms with your insurer (or potentially with your stop-loss insurer, if you have a self-insured plan) to ensure that coverage will remain in effect and that the company will not have to self-insure the coverage. Be sure to amend your health plan document to reflect the extended coverage period. In addition, be aware that if your health plan is self-insured, or if there is a cafeteria plan involved (e.g., if severed employees pay COBRA premiums pre-tax from their severance pay), certain nondiscrimination rules may apply. This is generally an issue if the employees receiving extended or subsidized COBRA coverage are highly compensated. While the application date has been delayed indefinitely, health care reform may eventually require insured plans to satisfy nondiscrimination rules as well.
Because severance plans involve many complicated issues, experienced employee benefits counsel should review the severance plan documents and the health plan documents to ensure that they accurately and consistently describe the subsidy. For more information, see EBIA’s COBRA manual at Section VII.M (“Special Issues: Severance Agreements and Severance Pay”); see also EBIA’s Cafeteria Plans manual at Section X.G.3 (“Using the Final Paycheck or Severance Pay to Fund COBRA Premiums Through the End of the Cafeteria Plan Year”).
Contributing Editors: EBIA Staff.
IDAHO INSURANCE AGENCY
Paul King and Charlotte Hildebrandt
1650 Albright Ln #101
Boise, Idaho 83709