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COBRA changes sting area companies

New provisions that make it easier for laid off workers to
continue receiving health insurance benefits are shaking up human resources
departments across the midstate.

New provisions that make it easier for laid off workers to
continue receiving health insurance benefits are shaking up human resources
departments across the midstate.

As a portion of the $787 billion economic-stimulus package,
the federal government will pay 65 percent of the cost of Consolidated Omnibus
Budget Reconciliation Act (COBRA) benefits for employees involuntarily
terminated between Sept. 1, 2008, and Dec. 31, 2009.

The subsidy, which lasts up to nine months, took effect
March 1.

“There are two sides to this: From an employee standpoint,
this remains a tough economy, and I can’t say enough about how much it will
help,” said Charlie Dielmann, director of benefits for Manheim Township-based
Horst Insurance.

“But there will be a burden to employers in administrative
costs and even the possibility of some (other) costs to the employer,” he said.

Businesses pay the 65 percent subsidy to former employees
and get reimbursed by the government in the form of a payroll tax deduction –
but first, they must make sure everyone who’s eligible for the subsidy is given
the opportunity to receive it.

The provision creates a large amount of potentially
complicated paperwork that must be done in a short time – so much so that many
companies that have handled their own COBRA benefits now are hiring outside
companies to do so, Dielmann said.

But the timeline is condensed with good reason, officials agreed.

“Health care is just so expensive,” said Scott Fiore, a vice
president and partner at Manheim Township-based TriStarr Staffing. “The
priority is to get people served.”

Employers must determine who is eligible to receive the
subsidy and notify them by April 18. Employers also must give eligible
involuntarily terminated workers who originally had not elected COBRA benefits
another 60 days to enroll in COBRA.

And that’s not as simple a task as it might first appear:
One of the largest gray areas in the measure is what “involuntarily terminated”
means.

It’s unclear if individuals who resigned voluntarily as part
of a buyout or who quit at the request of a supervisor rather than being fired
would qualify as “involuntarily terminated,” said Charles Scheim, a
Reading-based attorney with Stevens & Lee who specializes in employee
benefits.

In a related issue, there are questions about what qualifies
as “gross misconduct,” said Catherine E. Walters, a partner and practice
management-side labor and employment relations at Saul Ewing in Harrisburg.

Employees who are terminated for gross misconduct are not
eligible for COBRA.

“There’s very little guidance, and we’ve started getting
questions about that issue,” she said.

And there’s a lot riding on who does and doesn’t get one of
these eligibility letters and on how much reimbursement employers ask for.

“When employers are applying for tax credit, in essence
they’re doing a tax return. Making any statement to government – you can’t do
that fraudulently,” said Christina Hausner, a partner at East Hempfield
Township-based law firm Russell, Krafft & Gruber.

“Employers and their accountants all going to have to be
careful that even inadvertently they aren’t making statements that are not
accurate with respect to the nature of termination (of any individual).”

The law also forces employers to send out notices of the
subsidy to all employees and their qualified beneficiaries who had a “COBRA
event” within the specified time period, Scheim said.

A “COBRA event” includes being involuntarily terminated but
also encompasses when an individual loses health insurance for other reasons
such as a divorce or a child losing dependent status.

This quirk means individuals who aren’t eligible for the
subsidy will receive a potential eligibility notice and that these people might
mistakenly try to file for coverage, Scheim said.

The federal government also has not released the forms for
employers to report eligible individuals. The government has said it plans to
offer more guidance on the COBRA changes March 19.

The new provision may change the way employers structure
health care benefits provided in severance packages because it’s unclear
whether employees who receive assistance from employers on COBRA are eligible
for the full subsidy, Walters said. 

The new law also might have unintended effects on
businesses’ cash flow, those familiar with the law said.

Employers will be able to deduct the subsidy from payroll
taxes on a quarterly basis, but it is unknown how much lag time there will be
between employer payments and government reimbursement.

The government also has not clarified the reimbursement
mechanism that applies to businesses whose COBRA refund would exceed their
payroll taxes.

These provisions might create cash-flow problems for smaller
businesses or those that have laid off a significant portion of their
workforce, Fiore said. 

Furthermore, some are afraid the subsidy will drive
health-insurance costs higher because of adverse
selection or endanger certain employers’ insurance coverage.

People who are more in need of health care will be more
likely to take advantage of the subsidy, which might drive insurance rates
higher overall, Scheim said.

Some health insurers also are reluctant to insure businesses
with more than 10 percent of employees on COBRA, Dielmann said. The subsidy
might push more companies into that category and therefore may affect their
coverage, he said.

But Hausner said taxes might increase without the subsidy to
help pay for the government to cover the uninsured.

“While (the new law) may be a nuisance – another regulation,
another requirement – it does give the employer the opportunity to pass through
a benefit for employees being terminated,” she said. 

And there’s another upside to the new law, officials agreed
– the disruption should be temporary.

“There is zero hard cost. Once people get caught up with the
administration of this, it shouldn’t be any different than administering COBRA
plans on a regular, day-to-day basis,” Fiore said.


American Recovery and Reinvestment Act COBRA basics:

  • The federal government will pay 65 percent of COBRA
    health-insurance premiums for those “involuntarily terminated” (and their
    qualified beneficiaries) between Sept. 1, 2008, and Dec. 31.
  • The 65 percent subsidy took effect March 1 and will last up
    to nine months.
  • Employers have until April 18 to notify involuntarily
    terminated workers of their eligibility for the subsidy.
  • Employers must allow individuals who were involuntarily
    terminated during the eligibility period another 60-day opportunity to enroll
    in COBRA.
  • Income caps to receive the full 65 percent subsidy are at
    $125,000 for an individual and $250,000 for a family.
  • An individual may only receive the subsidy through the end
    of their COBRA eligibility even if they did not immediately start receiving the
    reduced rate.
  • Employers deduct the 65 percent of COBRA payment from
    their payroll taxes. If the subsidy payment exceeds the payroll tax deposit,
    the IRS will make an alternative credit or refund mechanism available.
  • Termination of a company’s benefits plan eliminates its
    COBRA obligations.
  • As with other COBRA provisions, it is ultimately the
    employer’s responsibility to ensure eligible employees are notified about the
    subsidy.

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