What Everyone Needs to Know About the Coordination
of Severance Benefits, COBRA, and the ACA
06.09.14 - Davis Wright Tremaine
By Richard J. Birmingham
In a common occurrence throughout corporate America, an employee
terminates employment and as a result will lose company-provided
health care coverage. To obtain health care coverage, the employee
has two options: 1) elect health care coverage for up to 18 months
under COBRA, or 2) purchase coverage by utilizing the marketplace
established pursuant to the Affordable Care Act (gACAh). In a
severance situation, it is not uncommon for the employer to also
pay, pre-tax, the COBRA premium for a few months, enabling the
employee to have additional time to consider the available health
plan options. While this situation is common and seems
straightforward, the coordination of health coverage under COBRA and
the ACA contains a number of potential traps for both the employer
and the employee. An understanding of the basic coordination
problems, and the potential solutions as set forth below, is
essential for anyone dealing with employee terminations and
severance. In addition, there is a limited opportunity for special
relief through July 1, 2014.
COBRA election
If an employee leaves the
company, the employee is generally entitled to continue health
coverage under COBRA, provided the employer employs 20 or more
employees. The employee can elect coverage within 60 days after
receiving the COBRA Notice and the coverage is retroactive to the
date of the loss of coverage. However, COBRA coverage may be more
expensive than coverage provided under the ACA marketplace. In
addition, the COBRA Notice is often mailed weeks after the
employeefs termination, so the employee may already have medical
needs before the Notice is received.
ACA election
An employee can also obtain
coverage by purchasing an ACA marketplace plan. However, the
coverage is prospective. In addition, an employee can only purchase
marketplace coverage during the annual open enrollment (Nov. 15 to
Feb. 15) or during a gspecial enrollment period,h within 60 days of
a gqualifying life event,h i.e., loss of health coverage, change in
family size, move to a new coverage area, change in premium tax
credit eligibility, experience government error, or change in
citizenship status. If the employee misses the open enrollment or
special enrollment opportunity, the employee must wait until the
next open enrollment date. If the employee elects coverage under
either the ACA or COBRA and voluntarily drops the coverage, the
employee must wait until the next open enrollment period.
Coordination problems
A number of common
coordination problems provide a trap for the unwary.
Problem 1. Employee terminates employment on May 29 and
employer coverage ends on May 31. Employee has significant medical
bills during the month of June. The employee can elect ACA
marketplace coverage beginning July 1, but coverage is prospective
and the June bills would not be covered. Employee can elect COBRA
retroactive to June 1, and the medical bills will be covered, but
the COBRA coverage may be more expensive than the ACA coverage.
Problem 2. The employee elects COBRA and pays COBRA
premiums for June and July, to get retroactive coverage for the June
bills. At the end of July, the employee drops COBRA with the intent
of enrolling in a less expensive ACA marketplace plan. The voluntary
relinquishment of rights under a plan is not a gqualifying life
eventh under the ACA. The employee will not be able to enroll in an
ACA marketplace plan until November, with an effective date of no
earlier than Dec. 1. Unless the employee meets an exemption from the
individual insurance mandate, the employee will also be subjected to
an ACA penalty for not having insurance for five months.
Problem 3. As part of severance, the employer pays the
COBRA premiums, pre-tax, for two months, June and July. If the
employee is highly compensated, the payment may constitute a
discriminatory health plan under Section 105(h) of the Internal
Revenue Code (gCodeh), subjecting a participant in a self-insured
plan to taxation on the benefits received (or may penalize the
employer under the ACA if insured). In addition, with respect to
both highly and non-highly compensated employees, if the employee
drops the coverage, the employee will not be able to enroll in the
ACA marketplace plan until the following November, because, as
explained above, the voluntary relinquishment of coverage (COBRA) is
not a qualifying life event under the ACA. Again, an employee who is
not exempt from the individual mandate will also be subjected to an
ACA penalty for not having insurance for five months.
Best practices
These issues can be minimized
on a severance situation by making a cash payment to the employee of
the COBRA premium that the employer was previously paying on the
employeefs behalf. The cash payment will avoid the issue of a
discriminatory plan under the ACA, because after-tax payments of
premiums are not subject to Section 105(h) of the Code. The cash
payment will also enable the employee to determine whether to
retroactively elect COBRA or to prospectively elect ACA coverage.
However, if retroactive COBRA is elected, the employee, to have
insurance, must continue that coverage until the next ACA open
enrollment period, or until the end of the 18-month COBRA period.
While this is not a perfect solution, it is still better than the
alternative, until Congress enacts legislation to coordinate the ACA
and COBRA. Also, employers should update their COBRA Notice to
explain this issue to all their employees.
The Center for Medicare and Medicaid Services (CMS) has
established a limited special enrollment period beginning May 2,
2014 and ending July 1, 2014, in which an individual can drop COBRA
and enroll in the ACA marketplace plan. This limited enrollment
right only applies to federal marketplace plans, and not state plans
(but the states can establish a similar special enrollment period).
After July 1, 2014, the COBRA and ACA coordination problem will
continue to exist for all terminations, unless remedied by Congress.
Most employers will resolve the coordination problem as follows:
- Educate staff concerning the coordination
problems. Human resources staff and employment and
corporate personnel involved in severance situations need to be
educated on these coordination issues to ensure proper
communication in the termination process. To date, these
coordination issues have largely gone unnoticed.
- Update employee communications and COBRA
Notices. Employers should communicate that ACA coverage
is prospective while COBRA coverage is retroactive. Employees with
ongoing health problems may find that COBRA is the only way to
ensure that there is absolutely no gap in coverage, while healthy
employees might want to wait and elect ACA coverage within 60 days
of their qualifying life event. While the Department of Labor
(DOL) recently issued, on May 2, 2014, a revised model notice to
inform employees of the ACA marketplace plans, employers may wish
to add additional examples to the model notice to highlight
coordination problems for employees.
- Pay any health premium subsidy on an after-tax
basis. To avoid discrimination penalties and to avoid
coordination problems caused by a premature COBRA election, any
employer payment of COBRA premiums on the employeefs behalf should
be paid to the employee after-tax in a lump sum payment as part of
any severance package.
Disclaimer
This advisory is a publication of Davis
Wright Tremaine LLP. Our purpose in publishing this advisory is to
inform our clients and friends of recent legal developments. It is
not intended, nor should it be used, as a substitute for specific
legal advice as legal counsel may only be given in response to
inquiries regarding particular situations.