By now you know that a number of different laws (and governing bodies) impact your severance arrangements. You know that waivers need to withstand EEOC scrutiny (click here for a review) and that your arrangement may be subject to ERISA (click here and here for a review.) Many employers when crafting severance arrangements and agreements focus on the amount of severance pay, the waiver, stock options and continuation of health benefits for a certain amount of time. Is that enough? If you provide a former employee two months of benefits, can’t s/he continue benefits under COBRA? It may no longer be as simple as that. Allow me, if I may, to introduce your severance arrangements to COBRA and the Affordable Care Act, after the jump…
Suppose your company is compelled to conduct lay-offs and offers all terminated employees 3 months of medical coverage. What happens after the expiration of those three months? First let’s step back and make sure we know our cast of characters.
What is COBRA? What does it do? Which plans are subject to COBRA and who is eligible for COBRA benefits? COBRA is the Consolidated Omnibus Reconciliation Act. The parts we care about require group health plans to provide temporary continuation of group health coverage to covered employees, their spouses, former spouses and their dependent children, that might otherwise end at the occurrence of certain events, such as termination from employment. These provisions generally apply to group health plans maintained by private-sector employers, and state and local governments with 20 or more employees (including full and part-time) on more than 50 percent of its typical business days in the previous calendar year. (Group health plans sponsored by the federal government, churches and certain church-related organizations are exempt.) Suppose your company employs fewer than 20 people. Most states have their own laws that impose similar requirements on health insurers of employers with fewer than 20 employees. These laws are often referred to as “mini-COBRA” laws. At a minimum, then, you will need to check to see if the state(s) in which you employ people have any such laws.
Once your group health plan is covered by COBRA, a qualifying event must occur for an employee to be eligible for COBRA benefits. What’s a “qualifying event”? A “qualifying event” is one that causes either the covered employee or the spouse or dependent child to lose coverage. For covered employees, qualifying events are either termination of employment other than for reasons of gross misconduct, or reduction of hours in employment. For a covered employee’s spouse, former spouse or dependent child, a qualifying event includes the covered employee’s termination of employment (other than for gross misconduct); reduction in the covered employee’s hours of employment; the covered employee becoming entitled to Medicare, divorce or legal separation between the covered employee and the spouse, death of the covered employee, loss of dependent child status under the plan rules. Generally speaking, your terminated employee(s) their spouses, former spouses and dependent children are eligible for COBRA coverage if any of these qualifying events occurs, and they will have 60 days either from the date they receive the COBRA notice or the date they would lose coverage (whichever is later) to choose COBRA coverage. As long as they elect coverage within that election period they are eligible, and can even revoke their waiver if they do so within that 60-day election period. Coverage will be retroactive to the date they elected coverage.
Now, you may be thinking, “I already know this, and I already do this. What’s the problem?” Remember the Affordable Care Act? How can you not? Since 2010, it’s always there, looming ahead of you — and behind you and beside you. Under the Affordable Care Act, your former employees can opt to buy coverage under an ACA marketplace plan–and that coverage might even be more affordable than COBRA coverage. OK, you may be thinking, so now they have another option and can get less expensive coverage. Isn’t that a good thing? What’s the problem and why do I have to be involved?” The problem is two-fold: a) ACA marketplace coverage is prospective only. If the employee incurs significant medical expenses in the time between termination of coverage you provided and the effective date of ACA coverage, then there is no coverage for that time period. COBRA coverage is retroactive but is often more expensive than ACA marketplace coverage; b) ACA marketplace coverage is only available during annual open enrollment (Nov 15-Feb 15) or within 60 days of a qualifying event. If an employee does not act within either of those windows, s/he cannot obtain coverage under and ACA Marketplace plan until the next open enrollment period. Similarly, if part of the severance package you offer former employees includes paying the first few COBRA payments, the former employee(s) either must continue COBRA or go without coverage, until the next open enrollment period. Employees who opt to do without coverage will then be subject to the individual penalty. (Also, the COBRA payment could run afoul of the ACA’s non-discrimination provisions if any of the employees are highly compensated). In other words, the employee cannot go on COBRA for the retroactive coverage and then switch to an ACA marketplace plan a few months later; s/he will then have to wait until the next open enrollment period or for the occurrence of another qualifying event.
There is a way to mitigate these types of problems, and thereby still allow you to offer a viable severance arrangement — which benefits both you and the employee (click here and here for a review of how you benefit from a severance arrangement). OK, I won’t keep you in suspense. You can give the employee an after-tax cash payment in the amount of the COBRA payment(s). After-tax cash payments are not subject to these non-discrimination provisions and they allow the former employee(s) to then choose whether to retroactively choose COBRA or prospectively elect ACA marketplace coverage. Again though, employees electing COBRA must then continue coverage either until the next open enrollment period or the end of the 18-month COBRA period. However you decide to address this issue, it behooves you to educate your staff and update all COBRA notices and employee communications regarding COBRA/ACA issues.
Well, folks that’s enough of severance -and ACA issues for now. Starting next week we’ll look at some of the top FMLA issues, so I’ll meet you back here next week.
Disclaimer: This post’s contents are for informational purposes only, are not legal advice and do not create an attorney-client relationship. Always consult with competent employment counsel on any issues discussed here.
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Click here to download my webinar, What Employers Need to Know About Their Severance Arrangements.
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