COBRA changes help laid-off workers – but could ensnare employers

Laid-off workers will have to pay less to maintain their health insurance as a result of changes enacted by Congress – but these changes are creating new problems for employers who must take steps to comply with the law. The changes affect a federal law known as COBRA. The COBRA law says that fired or laid-off employees who had been eligible for health insurance through their employer have a right to continue receiving that insurance for up to 18 months. Normally, the employees have to pay their full share of the premiums – with no employer subsidy – but even so, this is usually much cheaper than buying health insurance individually and not as part of a group plan.

However, under the new changes from Congress, employees who are fired or laid off between September 1, 2008 and December 31, 2009 get a break. They only have to pay 35% of the cost of the insurance. The employer must pay the remaining 65% – although the employer can then be reimbursed for this amount by taking it as a credit against federal payroll taxes.

While this is great news for fired employees, the change can make life complicated for employers. Here are some reasons:

  • Employers must send a written notice about this change to all current employees.
  • Employers must also send a written notice about the change to all employees who were “involuntarily terminated” between September 1, 2008 and December 31, 2009. The law does not define what “involuntarily terminated” means, so if there’s any ambiguity about whether an employee left voluntarily, the employer should generally err on the side of caution and send a notice.
  • The Department of Labor has published model notices to make it easier for employers. However, there are four different model notices to be used depending on the status and eligibility of various employees.
  • The change (and the notices) might result in some disputes in which former employees apply for COBRA benefits and the employer refuses, claiming that the employees are not eligible. If the employer refuses to provide coverage, the former employee can appeal. The changes in the law include a new appeals process that allows a former employee to go directly to the Department of Labor, which will rule on the case within 15 days.
  • A big problem for employers is that they can’t seek a credit under the federal payroll tax until they are certain that the former employee has paid his or her 35% share to the insurance company. However, there’s no legal requirement that either the former employee or the insurance company notify the employer when the payment is made.
  • Finally, while COBRA generally applies only to companies with 20 or more employees, many states have a similar law for smaller companies. In such states, smaller companies are now required to pay a 65% share of benefits. This could be a problem for some employers because their 65% share could exceed their payroll taxes, meaning they can’t be fully reimbursed by taking a tax credit.