Businesses prepare for COBRA subsidies

March 15, 2009
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Employers are scrambling to put systems into place to comply with new COBRA provisions in the economic stimulus bill signed into law by President Barack Obama in February.

“I think it’s going to have a pretty direct impact on the small businesses that have more than 20 employees because of the subsidy,” said Scott Lyon, vice president of small business services for the Small Business Association of Michigan.

COBRA — the Consolidation Omnibus Budget Reconciliation Act of 1985 — allows employees who have been terminated from jobs in companies of at least 20 workers to take over the full cost of premium payments to continue health insurance for as long as 18 months. While it is an option for health insurance for the otherwise uninsured, it is voluntary and can be expensive.

Now, through the economic stimulus package passed in February, the federal government has agreed to cover 65 percent of COBRA premiums for people who have been involuntarily terminated from their jobs between Sept. 1, 2008, and Dec. 31, 2009. Companies must contact employees who were terminated between Sept. 1 and March 17 to inform them they have an opportunity to reconsider buying COBRA coverage with the subsidy.

“Employers are so focused, frankly, on staying alive that when I have to talk to them about complying with a new law, it’s like they’re fatigued — they’re overwhelmed. They’re like, ‘Why would I have to be distracted from trying to preserve my core business for the sake of doing this?’ That’s the most common reaction I’m getting,” said employee benefits attorney Mary Bauman, a partner at Miller Johnson.

Lyon said he expects the subsidy to boost the number of former workers choosing COBRA. The subsidy will be phased out starting with those earning $125,000 a year for a single, or $250,000 a year for joint income tax filers, ending at the $145,000, or $290,000 marks.

“Now, with the subsidies at 65 percent, we think a lot more ex-employees are going to find the health insurance plans affordable and therefore take them up. There’s a lot more administrative work that’s going to be required from the small businesses,” said Lyon, whose organization provides COBRA administration for about 300 members.

“They also are going to be essentially fronting 65 percent of the premium for those ex-employees, and then taking it on their quarterly federal employment tax form. They’ll get the money back, but they’re going to be fronting that money for a couple of months, and cash flow issues being what they are in small businesses, that’s a concern that we have.”

At the same time, businesses are waiting for guidance from the Department of Labor and the Internal Revenue Service, Bauman said. Bauman has conducted several informational sessions on the new law, which gave employers 11 days for implementation, adding that they are “hungry” for more information about who is eligible and what constitutes involuntary termination.

“Unless my employment was terminated for gross misconduct, I am probably going to be eligible for COBRA,” Bauman said. However, to receive the subsidy, the employee cannot be eligible for Medicare or for other group coverage through, for example, a spouse or a new employer.

“So even if I don’t enroll in that coverage and I am simply eligible for it — that cuts off my right to this subsidy,” she said. “If I’m married and my spouse works, there’s a real good chance I’m not going to be eligible for this subsidy. So it’s a huge issue.”

Less obvious are its applications in a buy-out situation or if the employee could be recalled under a union contract, she said.

“What if my employer offers some type of early retirement incentive program or some type of voluntary program to say, ‘I will give you something, whether it’s additional compensation  or some other benefit if you voluntarily leave?’

“Does that qualify? The answer isn’t clear, but I’m skeptical.”

In most circumstances, employers can charge 102 percent of the premium to recoup some costs of administering COBRA. Bauman said that, depending on the insurance plan, the cost to employees can run from about $500 per month for single coverage to $1,000 a month or beyond for family coverage. The subsidy discounts that price to $175 for a single and $350 for a family.

Lyon urged small business owners not to put off dealing with the law.

“The longer you wait, the bigger hassle it’s going to be,” he said. “There’s more chance to make a mistake that could cost you in the long run in fines and penalties.”

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