The present financial turbulence and uncertainty, precipitated largely by the enterprise response to COVID-19, has compelled employers to rethink how they handle advantages for staff that suffer job loss (together with—apart from termination of employment—layoffs, non permanent furloughs, and leaves of absence). One of many key advantages (aside from money) offered to staff that suffer job loss is sustained healthcare protection.
After all, COBRA offers terminated staff the flexibility to proceed protection usually for as much as 18 months after a termination or discount in hours of employment. Nevertheless, COBRA protection is expensive—certified beneficiaries should pay 102% of the complete price (employer and worker price) of protection. Congress is contemplating some sort of legislated subsidy for COBRA protection (as occurred throughout the financial challenges in 2009). However for now, the price of COBRA protection is an enormous challenge.
To ameliorate the impression of that price, employers will generally provide restricted intervals of prolonged protection as a substitute for COBRA protection. From a technical perspective, when an employer desires to supply a extra inexpensive different to COBRA protection, the query arises on learn how to combine that different possibility with the COBRA protection guidelines.
There are two important obstacles to advising employers in these conditions: (1) The group well being plan doc (if there may be one) is usually silent on the interaction between COBRA and different protection; and (2) the accessible regulatory and case legislation steerage shouldn’t be almost particular sufficient. This column will summarize the potential approaches that employers might observe when coping with different protection conditions.
What Is Different Protection?
First, let’s perceive what constitutes different protection. Different protection refers to any sort of continued protection after a qualifying occasion aside from strict COBRA protection. For instance, if an employer presents sponsored or free continued protection after a termination of employment (generally accomplished in severance pay plans), that sponsored protection is “different” protection. Typically an employer may provide a decrease degree of protection as a substitute for COBRA protection (which in any other case have to be an identical to the protection in impact instantly earlier than the qualifying occasion). In some instances, employers may even provide money as a substitute for certified beneficiaries electing COBRA protection. Principally, any time an employer decides to supply certified beneficiaries one thing aside from (or along with) COBRA protection, that’s an “different” to COBRA protection that have to be structured persistently with relevant authorized guidelines.
There are mainly 3 ways to supply different protection:
- A “alternative methodology,” whereby the choice protection is an possibility in lieu of COBRA protection—i.e., select COBRA protection or the choice.
- A “consecutive protection methodology,” whereby the choice is obtainable along with COBRA protection—i.e., you get COBRA plus an alternate protection after the tip of COBRA protection (otherwise you get COBRA protection starting on the finish of the choice protection).
- A “concurrent protection methodology,” whereby the choice is built-in with COBRA protection—e.g., you get free COBRA protection for six months following a severance from employment plus one other 12 months at full COBRA price.
Different protection situations happen in many various contexts. For instance, a really typical different protection state of affairs entails retiree medical protection. Mandated go away of absence guidelines (by legislation or by contract) additionally might require sure alternate options to COBRA protection. The dialogue under explains the fundamental guidelines and concerns for offering some different protection together with COBRA protection and can assist employers and directors take into account the choices of their extra particular instances.
To assist their laid-off or ex-employees, some employers will provide a alternative as a substitute for COBRA protection. For instance, a decrease degree of protection may be accessible that might be extra inexpensive. An alternative choice is to supply terminated staff a extra restricted sort of continued protection—for instance, the certified beneficiary may take 6 months of free continued protection in lieu of the complete 18 months of COBRA protection.
When providing a alternative between COBRA protection and one thing else, keep in mind that the certified beneficiary’s election shouldn’t be efficient till the tip of the 60-day COBRA election interval. Technically, a certified beneficiary may conform to the choice and reject COBRA solely to alter his or her thoughts throughout the 60-day COBRA election interval. It is a explicit challenge throughout the COVID-19 interval, throughout which the COBRA election interval is open-ended till the tip of the nationwide emergency.
This capability to alter one’s thoughts is a downside to the selection methodology within the present atmosphere. For instance, if an employer presents money funds in lieu of COBRA protection (as a result of some may worth money greater than well being protection), a certified beneficiary may take the money after which flip round and resolve to take COBRA protection when it’s wanted a number of months later.
In contemplating money instead, watch out for potential pitfalls:
- There are all the time tax concerns in providing people a alternative between money (a taxable profit) and well being protection (a nontaxable profit). It’s potential to work round these points, however employers should be conscious of the tax guidelines when providing a “alternative.”
- A separate challenge arises below the Reasonably priced Care Act (ACA) and the Worker Retirement Revenue Safety Act (ERISA). In 2014, the federal government issued ACA FAQs explaining potential authorized considerations when persons are provided money funds in lieu of well being protection. These FAQs identified some authorized dangers when money is barely provided to people with larger well being claims; this design might represent a prohibited type of discrimination towards people primarily based on their well being standing.
- The choice protection possibility turns into a brand new group well being plan that can be topic to COBRA protection if there are any future qualifying occasions throughout the interval of other protection. For instance, assume a laid-off worker is obtainable a short-term protection different to COBRA protection. If that laid-off worker is divorced or dies throughout the short-term protection, that second occasion is a brand new preliminary COBRA occasion leading to 36 months of recent COBRA protection below the choice protection possibility.
Thus, earlier than simply providing an alternate protection possibility, make sure to take into account the long-term penalties.
Consecutive Protection Technique
The consecutive protection methodology can occur two other ways.
- An employer presents continued protection below an lively worker group well being plan for a restricted interval after termination or discount in hours of employment. Then COBRA protection would begin after that continued protection. For instance, below a severance plan, lively worker protection may proceed for a 12 months, after which the worker is taken into account “terminated” and COBRA protection commences.
In the sort of consecutive protection method, the interval of the “different” is simply handled as if the worker had been nonetheless actively employed. All of the relevant COBRA discover and election intervals are measured from the tip of the choice.
- Some employers will provide some sort of protection when COBRA is exhausted. In insured group well being plan conditions, that is accomplished through “conversion protection” choices. Conversion protection is particular person protection that’s separate from the underlying group well being plan. In uncommon conditions, employers may provide some sort of lesser group protection to certified beneficiaries. Once more, that different protection possibility, if a part of a bunch well being plan, is topic to future COBRA continuation protection if there are future qualifying occasions. So cautious planning is required.
Concurrent Protection Technique
The third common method to coping with different protection situations is to depend the interval of other protection towards satisfying the COBRA protection obligation. This selection is barely accessible if the choice protection in any other case totally satisfies the requirement that COBRA protection be an identical to the protection in impact instantly earlier than the qualifying occasion.
A basic instance of this method happens in severance plans through which a interval of sponsored lively worker protection is prolonged after which counted towards the general COBRA obligation. For instance, the severance plan may present for six months of sponsored group well being protection, which then counts towards the COBRA protection obligation of 18 months from the precise termination of employment.
One of many trickiest elements of administering the concurrent protection methodology pertains to coordinating COBRA notices to affected certified beneficiaries. It’s potential to supply COBRA notices on the time of the preliminary severance from employment and clarify within the notices that the COBRA premium for the choice protection possibility is sponsored. One other method is to supply COBRA notices after the tip of the choice protection interval and clarify that the choice protection is counted as a part of the general COBRA protection interval.
Closing Points To Think about
In deciding learn how to administer different protection and combine it with COBRA protection, listed below are some remaining concerns for every method:
- Are the principles defined in your COBRA language within the group well being plan doc, abstract plan description (SPD), and COBRA notices? It’s endorsed that these administrative guidelines be clearly articulated.
- Will your third-party COBRA administrator associate with your choices? Some third-party COBRA directors are usually not as prepared as others to deal with sponsored COBRA protection as a part of their COBRA administrative course of. That is often on account of inside enterprise choices and never as a result of the choice method shouldn’t be authorized. Due to this fact, it is very important make sure that any third-party administrator will go alongside.
- Think about any relevant tax nondiscrimination guidelines relevant to self-funded group well being plans. If different protection is offered in a self-funded group well being plan in a approach that favors extremely compensated people, there might be tax points to contemplate.
- Do not forget that since final March, we have now been within the COVID-19 pandemic, together with prolonged and open-ended election intervals for COBRA protection functions. All of the choices for offering different protection have to be evaluated in mild of the authorized actuality that till the pandemic is over, certified beneficiaries may have their very own choices as to when to elect and pay for COBRA protection.
Alternate options to COBRA protection are used fairly steadily and will be significantly useful in instances of financial uncertainty. By fastidiously contemplating the varied strategies for delivering the alternate options, employers and plan directors can strike the proper steadiness between design and authorized compliance. Different protection is defined in additional element in ¶1264 of Mandated Well being Advantages—The COBRA Information.
Paul M. Hamburger is co-chair of the Worker Advantages, Government Compensation, and ERISA Litigation Observe Middle and head of the Washington, D.C., workplace of legislation agency Proskauer Rose LLP. He’s additionally a frontrunner of the Observe Middle’s well being and welfare subgroup and a member of Proskauer’s Well being Care Reform Activity Pressure. Hamburger has greater than 35 years of expertise in advising employers and directors and is the creator of quite a few articles and publications on COBRA and different worker advantages points affecting pension and welfare plans. Hamburger is contributing editor of Mandated Well being Advantages—the COBRA Information and managing creator of The New Well being Care Reform Regulation: What Employers Must Know (A Q&A Information), fifth Version.