The COBRA Subsidy – a Taste of the Future?

June 20, 2009

maze2An E-mail came across my desk recently.  It was from one of the many employee benefit-consulting firms and information services that have uncovered my e-mail address and bombard me with information.

This one had some startling advice.

It advised employers to deny all applicants for the COBRA subsidy.

Why, you ask.

Well, it seems that our federal government speaks with forked tongue on whether to make it easier for recently unemployed workers to continue their health insurance.

The American Recovery and Reinvestment Act (ARRA) says that employees who are involuntarily terminated can apply for COBRA continuation coverage.  If they have been involuntarily terminated, they become an Assistance Eligible Individual (AEI to the cognoscente).

An AEI (you are now part of the cognoscente) pays 35% of the normal COBRA premium – a fairly substantial premium subsidy, although for the unemployed, still a hefty burden.

Guidance from the Department of Labor (DOL) appears to give weight to the individual’s determination on whether the termination was “involuntary”.  They  offer this guidance:

If you believe you meet the criteria for the premium reduction, complete the attached “Request for Treatment as an Assistance Eligible Individual” and return it with your completed Election Form.  Under federal law, you have 60 days after the date of this notice to return your completed Election Form and Request for Treatment as an Assistance Eligible Individual.

If you are denied treatment as an “Assistance Eligible Individual” you may have the right to have the denial reviewed by {the Department of Labor (for private sector employees) or the Department of Health and Human Services (for federal, state, and local governmental employees) as appropriate}.  Additionally, certain high-income individuals may have to repay the amount of the premium reduction through an increase in their income taxes.  (Your income for the year would have to be more than $125,000 ($250,000 for married couples) before you would have to repay all or part of the premium reduction.)

Here is what the Employee Benefit News writes:

And, employers should keep in mind that guidance from the Internal Revenue Service has made clear that “involuntary termination” is to be interpreted very broadly, including employees who quit in advance of a threatened layoff, seasonal employees, and even those employees who quit instead of being relocated by their employer.

The rub comes later.

The way that an employer gets the other 65% of the COBRA premium is by claiming the COBRA subsidy as a credit on the quarterly tax withholding reports that an employer files with the IRS – Form 941.

The IRS apparently takes a dim view of employer mistakes.  If for any reason, the plan takes a credit for the COBRA subsidy and it is subsequently determined that the presumed AEI is, in fact not an AEI at all, the employer will be considered delinquent in their quarterly remittance to the IRS.  The employer will be assessed interest and penalties for the shortfall.  Anyone who has had experience with IRS interest and penalties, knows that they can mount very quickly.  Depending how long it takes the IRS to come to the conclusion that the COBRA subsidy credit was taken inaccurately, the interest and penalties could exceed the subsidy credit.

Thus the advice – deny the claim first

The ARRA has an expedited process to appeal COBRA subsidy denials.  If the feds say its OK, then you, the employer, are protected against excessive fines from the IRS.

One can only hope that this consultant advice is playing to employers who want to hear that kind of advice.

So once again, the federal government comes up with a temporary and half baked solution to a permanent problem – health care coverage for the recently unemployed.  It makes it complicated and confusing from the outset with approximately 15 pages of forms and instructions.  Then it throws a few more roadblocks in the way with contradictory motives from another federal agency.

The amazing maze of health care in the United States of America!  What does this portend for health care reform?


COBRA – Stimulus or Bureaucracy?

March 14, 2009

Does Congress really think they are doing anyone a favor with the new COBRA subsidy provision in the recently enacted stimulus package? capitol_art_160_20080314161058

Why can’t they make it simple?

Conservatives who fear “socialized” medicine because it will make medicine more bureaucratic should acquaint themselves with COBRA regulations. Litigation over COBRA keeps lawyers and judges busy all over the country.  And what does any of it have to do with the delivery of care?

What is COBRA anyway?  The Consolidated Omnibus Budget Reconciliation Act of 1986 was one of those huge (thus the word omnibus) budget bills that included everything from tobacco price supports to fishing fees for foreign fishing vessels.   But it will be remembered because Title X (of XX) included provisions to permit those who lose their health insurance under an employer sponsored health plan to continue their health insurance under certain conditions (called qualifying events) and provided they pay the full cost of the coverage.

Because, the person without coverage is also usually without a job, and because the person must pay the full cost (actually 102%) of the coverage, very few people elect the coverage and those that do are more likely chronically ill individuals.  In insurance parlance, that’s called adverse selection.  The plan sponsor will usually end up paying more than they receive in premiums.

So what did Congress and President Obama do with COBRA? 

The new law makes the cost of COBRA premiums slightly more affordable.  Normally, a 65% discount would seem pretty attractive.  But the average cost of one of our family plans exceeds $1,000.  $350 – 450 per month for a family with one less breadwinner is still a stiff price. images_2 Imagine selling a Lamborghini at 65% off!  $70,000 for a $200,000 car is a huge bargain.  But for someone without a job?

The new law allows those terminated between September 1,2008 and February 17, 2009 and who initially declined their COBRA election, another opportunity to elect the coverage at the reduced rate.  And they can begin their coverage March 1 instead of the date of the qualifying event.

Unlike regular COBRA, the subsidy is limited to those who are “involuntarily” terminated and their family members.  The plan sponsor can rely on the employees’ attestation that they were involuntarily terminated. Read the rest of this entry »