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 (“ACA”). 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.
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 employee’s termination, so the employee may already have medical needs before the Notice is received.
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 “special enrollment period,” within 60 days of a “qualifying life event,” 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.
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 “qualifying life event” 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 (“Code”), 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.
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 employee’s 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 employee’s behalf should be paid to the employee after-tax in a lump sum payment as part of any severance package.