Beware the employer-paid COBRA continuance bear trap
The chief operating officer of an employer client of mine recently resigned his position to pursue his dream of launching his own consulting practice. As is common in these situations, he agreed to provide ongoing consulting services to this employer as a 1099 contractor for a period of time, and the employer agreed to provide certain severance provisions. One of these provisions was employer-paid COBRA medical continuation coverage for four months.
Shortly after this agreement was reached and his 1099 arrangement began, he reached out to me with his exciting news and asked for advice regarding which individual health plans to consider at the end of the four months. After offering congratulations on his exciting new business and asking a few clarifying questions, I gently shared that he had walked right into the employer-paid COBRA continuance bear trap. In short, the end of employer-paid COBRA does not create a special enrollment period in most, if not all, individual health insurance marketplaces/exchanges. Specifically, it’s not a special enrollment period in the federal marketplace (healthcare.gov) or in any state marketplace we’re aware of, including Maryland Health Connection or Covered California, for example.
Confusingly, it’s the end of COBRA continuation (usually 18 months) that creates the loss of coverage triggering a special enrollment period in the individual marketplaces/exchanges, not the end of employer-paid COBRA. A general misunderstanding coaxing us into this bear trap is the false notion that in the Affordable Care Act era, anyone can purchase an individual health policy at any time on a guaranteed issue basis (no medical questions).
In reality, individual policies only can be purchased during the annual year-end open enrollment or if a special enrollment period is triggered. Another logical yet false assumption is that the elimination or reduction of employer COBRA premium subsidization creates a qualifying event in the individual marketplace just like a midyear change in employer subsidization of active employee coverage usually creates a status change in a Section 125 plan (via a change in the cost of employee coverage).
Because this former COO had already terminated employment, it was too late to turn this ship around. His new course of action became staying on COBRA through the end of this year (2018), begin paying 100% of COBRA premiums once employer subsidization ends and buying an individual policy effective Jan. 1, 2019 via the year-end true open enrollment (no strings attached) on the federal marketplace. Given his specific situation, this new course of action will prove costlier as his COBRA premiums are notably higher than available individual policy premiums.
While there are several other regulatory headwinds facing employer-paid COBRA arrangements, including 105(h) nondiscrimination regulations on self-funded plans, this relatively new bear trap is reason enough for employers to simply cease subsidizing COBRA. The resulting risk is too much for the employer and the individual. Talk with your attorney and ask if they agree. Ask for recommendations on mapping out a new policy regarding severance agreements. These recommendations might include shifting dollars from COBRA subsidization to cash compensation.
While I’ve seen some employers attempt to navigate around this bear trap by simply extending active employee health benefits for a period of time to terminated employees (aka COBRA-eligible individuals), this practice simply walks into the even bigger bear trap of covering an individual who’s generally not eligible for the plan. If the incurred claims of this individual are audited by your insurer or stop loss carrier, claim payments may be denied. Check the eligibility terms of your health plan and policy.
Similarly, another creative yet problematic technique I’ve witnessed is placing the otherwise terminated employee on a “leave of absence” and continuing the employee’s coverage under the active plan until this “leave” ends. While some health plans and policies do contain customized leave of absence eligibility rights, most do not, and almost all would not accommodate this creativity. Again, review your eligibility terms and consult with your attorney. It’s not worth walking into a million-dollar uninsured claim risk liability in an attempt to circumvent this bear trap.
Finally, some would argue that by the time employer-paid COBRA subsidization ends, most individuals will have found new employment and satisfied the eligibility waiting period of the new employer’s health plan. Maybe, maybe not. But, our ability to predict the future with certainty is rather limited, wouldn’t you agree?
Thanks for reading this essay. An astute commenter noted that a chart on healthcare.gov states that “… if your former employer stops contributing and you must pay full cost,” the individual qualifies for a special enrollment period outside of open enrollment. However, upon reviewing the federal government’s regulations on this matter, we might conclude that this chart’s statement is overly broad. The chart seems to assume that an individual voluntarily dropping COBRA coverage simultaneously becomes eligible for premium assistance, which is a limited situation. Again, I recommend consulting with your attorney on this greater matter. Further, note that the information posted on healthcare.gov does not necessarily apply to the various state exchanges. Finally, as another astute commenter notes, it’s ultimately the applicable marketplace that decides if one qualifies for a special enrollment period. Given all of these confusing variables, certain employers are deciding to take the exit ramp and no longer subsidize COBRA premiums. -Zack