Today, many employers are offering severance packages to employees involved in a layoff. An often-overlooked COBRA issue is the manner in which these severance packages are structured. If the package is improperly structured, an employer may be inadvertently delaying the loss of coverage for its former employees and subjecting itself to the possibility of uninsured claims, notice penalties and/or excise taxes.
Under current COBRA regulations, qualified beneficiaries involved in a layoff are entitled to a maximum of 18 months of continuation coverage, unless the qualified beneficiary becomes disabled or experiences a second qualifying event. This COBRA period, for purposes of the qualified beneficiary, begins on the later of the qualifying event date or the loss of coverage.
If an employer elects to provide benefits during a severance period, a problem arises in how the package is communicated to former employees. For example, Acme Widget Company may state that it will pay for three months of health insurance coverage. Because of the manner in which the package is communicated, the former employees stay on the active insurance bill for an additional three months. If a former employee under this type of arrangement were to experience a large claim, the carrier may perform an eligibility audit and deny the claim under the contract’s “actively at work” provisions. A second possibility is that the carrier may refuse to accept the former employee as a COBRA participant. COBRA is an employer law, not an insurance law. Carriers will accept COBRA participants within the statutes’ timeframes, but if an employer artificially extends those timeframes by delaying the loss of coverage, the insurer is under no obligation to clean up the employer’s mistake. Too often, employers end up self-insuring claims because they inadvertently delayed the loss of coverage.
A far better course of action is to communicate to the former employee that as part of the severance package, the employer will pay for the first three months of COBRA continuation. The qualified beneficiary is responsible for COBRA premium payments commencing on the fourth month. A severance package structured in this manner may help an employer avoid the "loss of coverage" trap.