Employers that pay for all or a part of a terminated employee’s COBRA coverage* should consider providing notice to terminating employees that electing to receive subsidized COBRA coverage could affect their ability to elect coverage under the public health exchange or “Marketplace” established under the Affordable Care Act (ACA).

For example, assume ABC Corporation is a typical company with a typical group health plan under which Employee D is covered.

  • ABC Corporation terminates Employee D on September 30, 2016
  • ABC offers D severance and subsidized COBRA coverage for 6 months, as part of a severance plan
  • D chooses to elect subsidized coverage under the ABC plan because it is familiar and it offers cheaper and better coverage than in the Marketplace

When the six months of subsidized coverage under the ABC plan ends on March 31, 2017, D generally could not drop their COBRA coverage under ABC’s plan and enroll in cheaper coverage through the Marketplace until January 1, 2018.

This is because an individual can only elect to elect medical benefits through the Marketplace (i) upon losing job-based coverage, (ii) during an “Open Enrollment” period (which typically begins in November and ends on January 31), or (iii) upon exhausting his or her eligibility for COBRA coverage (generally after 18 months). In our example above, D could elect medical benefits through the Marketplace:

  • During the 60-day enrollment period after losing their ABC Corporation job-based coverage
  • During the 2017 open enrollment period, effective January 1, 2017
  • During the 2018 enrollment period, effective January 1, 2018, or
  • Effective April 1, 2018, after the end of their 18-month COBRA period

What is an employer to do? Some employers offer individual counseling as part of an exit interview. However, many employer do not want (or cannot afford) to get into the level of counseling or communication necessary to explain this trap. Those employers should consider revising their COBRA or severance election forms to alert severance eligible employees of the possible trap.

*Note that most companies do not directly subsidize COBRA coverage for executives due to the ACA nondiscrimination rules. Instead, the company provides a monthly [taxable] cash payment to the individual. Many companies require the individual to have elected COBRA in order to receive this monthly payment. If the company directly subsidizes COBRA coverage, i.e., by offering it at a reduced contribution rate, and then raises the rate to full price, the individual may qualify for a “special enrollment period.”