The news has been abuzz recently with several large corporate mergers and acquisitions. No doubt large corporations have teams of lawyers on staff to ensure compliance during and after corporate changes. However, even businesses that are not large enough to staff a team of lawyers undergo mergers, acquisitions and restructuring.  While these businesses may not make the evening news, they are held to the same COBRA compliance standards as large employers. 

Corporate events such as mergers and acquisitions often signal growth, but also often lead to inevitable layoffs as positions become duplicative or new management makes changes. To smooth the transition for laid-off employees, employers often provide severance pay and sometimes continue to pay a portion of health benefits for a set period. However, severance agreement language and seemingly small operational details can create widely differing COBRA results. While downsizing may get you down, don’t trip over these three COBRA mistakes.

There are several different ways to handle COBRA in a severance situation. Improper documentation can lead to unintended consequences such as deferring the COBRA start date. Consider an employer who wishes to continue paying the employer portion of a laid-off employee’s health insurance for 12 months following termination. Let’s look at two scenarios.

Scenario #1: The severance agreement provides that the termination of employment causes a loss of coverage for COBRA purposes and the employee must elect COBRA in order to continue health insurance. The agreement provides that the employer will pay a subsidy toward the monthly COBRA premiums for the first 12 months of COBRA.  The employer sends a timely COBRA notice upon termination of employment and the employee elects COBRA. Provided the employee makes timely payments of his portion of the premium, he will be entitled to COBRA for 18 months following his termination of employment – 12 of which will be subsidized by the employer.

Scenario #2:  The severance agreement provides that the employer will pay for group health coverage for 12 months following the termination of employment but is silent on whether the coverage is provided as extended-active coverage under the group health plan or as COBRA coverage with an employer subsidy for the COBRA premium. The employee signs the severance agreement and the employer does not distribute a COBRA election form. Under this scenario, the employee has an argument that the employer has adopted an extended notice rule and that 18 months of COBRA do not start until coverage is lost at the end of the 12 months of employer payments – entitling the employee to 30 months of continued coverage. This can create a problem with the plan’s insurers and can lead to potential daily penalties if a COBRA election notice is never sent.

As you can see, clear language detailing COBRA rights is essential in severance agreements.

It is no secret that COBRA can be expensive. Employees who were used to a generous employer contribution toward the cost of coverage are suddenly faced with paying 102 percent of the premium amount. During a time of unemployment, the former employee may become eligible for subsidies to reduce the cost of insurance if purchased through the Health Insurance Marketplace created by the Affordable Care Act. It is extremely important to educate employees on how COBRA and Marketplace coverage interact.

Consider the situation where an employee is laid off in mid-February. Under a severance agreement, if the employee elects COBRA, the employer will pay a large portion of the COBRA premium for three months – through the end of May. After three months of COBRA, the employee will be required to pay the full 102 percent COBRA premium. The employee intends to elect COBRA for the three months that the employer contributes toward the premium and then enroll in a Marketplace plan and utilize subsidies to reduce monthly premiums. 

There is one major problem … the employee will not be eligible to enroll in the Marketplace plan at the end of the three months.  Individuals have 60 days from a loss of coverage to enroll in Marketplace coverage. Outside of the 60-day window, you must experience one of the listed special enrollment events or wait for open enrollment with coverage beginning the next January. The end of an employer payment toward COBRA coverage is not an event that creates special enrollment rights under the Marketplace. 

In our example, the employee will lose the employer payment on June 1. Unless the employee experiences a listed life event allowing special enrollment, the only way to prevent a gap in coverage may be to pay the full COBRA premium for the remaining seven months of the year. Communicating these rules to downsized employees in advance can prevent much frustration. 

Employers often require employees to sign a release of future employment related claims in order to receive severance pay. While these types of settlement agreements are smart in the employment-law context, employers will violate the law if they condition the receipt of COBRA benefits on the execution of a release of claims. The only thing employers can do is condition the receipt of an employer payment toward COBRA premiums on the employee signing a release of claims. Just to be clear, employers CANNOT withhold COBRA from an employee who refuses to sign a release of employment related claims. To reiterate, employers should not even imply that an employee must sign a release in order to receive a COBRA election form. Period.

If faced with a downsizing situation, remember that clear COBRA communication is key. Ensure that all severance agreements adequately deal with COBRA. 

This article was reprinted from the June 2018 issue of America’s Benefit Specialist Magazine featuring our very own Robert Meyers.