Apr 30, 2024
Employer COBRA Subsidies
Date Issued: April 2024
Background
Employers may want to provide an employee with a COBRA subsidy for any number of reasons, whether it is to help meet their own affordability requirements or to help out an employee. Regardless of the reason for the subsidy, there are a few issues that the employer should consider before implementing a COBRA subsidy. This article discusses those issues, including potential implications of and alternatives to a COBRA subsidy.
COBRA Paperwork
To avoid potential claims of any COBRA violation (e.g., failure to timely offer COBRA continuation coverage), it is important that COBRA election paperwork still be required in order for a qualified beneficiary to continue coverage and take advantage of the employer subsidy. The terms and conditions (including the length) of the employer subsidy should be clearly defined in such paperwork.
Nondiscrimination Rules
If the plan is self-funded, and the employer subsidy is only available to some employees, it will be necessary to consider §105(h) nondiscrimination rules. These rules restrict the ability to offer benefits in a way that favors highly compensated individuals.
NOTE: Fully insured group health plans are not subject to the same nondiscrimination rules and therefore could favor highly compensated employees for receipt of COBRA subsidies so long as no employee contributions are handled pre-tax through the employer’s cafeteria plan.
Taxation
Whether a qualified beneficiary should be taxed on the employer COBRA subsidy will depend on the method of distribution of the subsidy.
The employer subsidy to the qualified beneficiary is taxable if the employer pays the premium amounts directly to the qualified beneficiary for them to then pay the insurer. Since there is no guarantee that the qualified beneficiary will use the funds to pay for the COBRA premiums, the funds are deemed taxable income.
The employer subsidy to the qualified beneficiary is not taxable if the employer:
- Reimburses the qualified beneficiary for premium payments that the qualified beneficiary has made to the insurer, and the qualified beneficiary provides documentation that verifies that payments were actually made to the insurer;
- Pays the premiums directly to the insurer; or
- Waives some or all of the COBRA premium that would otherwise be charged for a self-funded plan.
The real lynchpin in determining taxation of the employer subsidy is whether an employer can guarantee that their funds are being used for the COBRA premium – if that guarantee can be made, then the employer subsidy can be provided on a non-taxable basis.
Potential Consequences
If the employer subsidy will not cover the entire maximum period of coverage under COBRA, then it is important to consider what position the qualified beneficiary will be left in once the employer subsidy ends. The end of an employer subsidy for COBRA will trigger a special enrollment period on the public Exchange for the qualified beneficiary. However, the end of an employer subsidy (or voluntary early termination of COBRA) will not trigger a HIPAA special enrollment period for the qualified beneficiary to enroll in other group health coverage. So, while there is the coverage option of the Exchange once an employer subsidy ends, it will not be an option to enroll in a group health plan midyear when the subsidy ends (i.e., the qualified beneficiary would have to wait until a group health plan’s open enrollment to enroll). This information should be clearly spelled-out in any employer documentation provided to the employee regarding this arrangement.
Alternatives
If an employer wants to assist an employee with medical coverage following a loss of eligibility, there are other options besides a COBRA subsidy. The employer could:
- Continue active coverage for a certain period of time, although the plan eligibility rules must allow for this to ensure that the insurer or stop-loss vendor will cover claims (e.g., retiree coverage).
- Offer cash or reimbursement for premiums of other coverage or medical cost-sharing (e.g., via an HRA) in exchange for a waiver of COBRA rights. It is not uncommon to offer such “alternative arrangements” to COBRA, but such waivers of COBRA rights should be very carefully drafted with the assistance of counsel to avoid a COBRA violation.
- Offer cash, or increase the severance pay, without tying it directly to medical reimbursement. Providing additional taxable compensation that the individual can then use as desired can often be the simplest solution.
Below are links to previously posted articles related to COBRA.
April 2024 Question of the Month - More Information on COBRA Subsidy
Refresher-Determining COBRA Premiums for HRA Plans
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