Question of the month: Should we offer COBRA payments as a part of a severance package?

Dear Gina:

Unfortunately, our company is preparing to layoff several employees. To lessen the blow, we are considering paying for COBRA for a period of time on behalf of those terminated employees. Should we do this?

A: While offering to pay for COBRA for terminating employees may sound like you are helping, it can actually end up as a burden to the employees you are trying to help. That’s because they’re stuck on your plan as a COBRA participant until December without any other options. Say you offer to pay three months of COBRA after someone terminates employment, after that 3 months is over they are stuck paying for COBRA even if it is more expensive than an individual plan. In this scenario, if the participant did cancel their COBRA coverage after the employer finished paying for it, they would have done so voluntarily. Because it was not an involuntary loss of coverage, (like the original termination of employment), the individual Exchange won’t allow them to enroll until the next enrollment period. This leaves the participant with only a couple of options:

    1. Go without insurance until January 1st when the Exchange will let them enroll in a new medical plan at open enrollment or
    2. Pay the premiums themselves and stay on COBRA until December 31st

One more reason to not offer COBRA as part of your severance package: your group’s renewal rates may be negatively impacted by having COBRA participants. Insurance carriers will tell you (wink-wink, nudge-nudge) they don’t factor that into groups smaller than 50 but in reality? Better to find other ways to add compensation to severance packages.

– Gina



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