Employers may see rush for COBRA cover

WASHINGTON--Millions of U.S. residents who have been laid off would be eligible for subsidized COBRA health care coverage under legislation racing through Congress, with employers having little time to comply with the numerous and significant requirements laid down by the legislation.

Last week, the House of Representatives and the Senate Finance Committee easily approved massive economic stimulus bills that include a federal subsidy of COBRA premiums for employees who have lost their jobs.

Under both measures, the federal government would pay 65% of COBRA premiums for employees laid off from Sept. 1, 2008, through Dec. 31, 2009. Under the House bill, premiums would be subsidized up to 12 months, while the Senate measure would limit the subsidy to nine months.

Such a subsidy is needed because COBRA health insurance coverage, in which beneficiaries pay 102% of the cost of coverage provided to employees, is out of reach for many of the unemployed, congressional backers say.

Monthly COBRA premiums of $400 for single coverage and $1,200 for family coverage are common, consultants say.

"For most folks who have lost their job, this is simply unaffordable," said Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee. "Helping displaced workers and their families to maintain and afford health coverage is the right thing to do as we work to get our economy back in shape."

The federal subsidy, though, would end if the beneficiary became eligible for health insurance coverage from a new employer or, in the case of older employees, became eligible for Medicare.

The House bill would go even further and extend unsubsidized COBRA coverage to older employees and longer-service employees until they are eligible for Medicare. That extension--a big change from current law in which COBRA coverage terminates after 18 months in such situations--would be available for employees who worked for an employer for 10 years or employees who stopped working as young as age 55.

Unlike the COBRA premium subsidies, which would be temporary and limited to employees who are laid off, the House extension would be permanent and COBRA coverage would be available to individuals who quit or were terminated.

Noting considerable business opposition to the broad COBRA extension in the House bill, Washington lobbyists said it is unlikely to be part of the final stimulus legislation that Congress is expected to approve later this month (see sidebar).

But given that COBRA premium subsidies are in both bills and that the subsidies are a priority of congressional leaders, it is a near certainty that a COBRA premium subsidy provision will be in the final bill, said Paul Dennett, senior vp with the American Benefits Council in Washington.

"It is quite clear that a subsidy provision is highly likely to be enacted," Mr. Dennett said.

Based on the legislation's current wording and assuming final action this month, the subsidies would be available starting April 1, giving employers just weeks to comply with the new requirements.

"There is no question that employers will be facing a very tight time frame," Mr. Dennett said.

The first and perhaps most challenging priority for employers would be locating and communicating to employees laid off since Sept. 1, 2008, who previously declined COBRA that they have a new right to opt for the health care coverage with the government picking up 65% of the premium.

Under the legislation, individuals would have 60 days after receiving a notification from their former employers of their new right to receive subsidized COBRA coverage. The coverage would be prospective.

Experts say employers would face the challenge of quickly drafting the new notices, determining who would be eligible for the subsidized coverage and then trying to locate those individuals.

"You are going to have to start to think this through. You are going to have to identify terminated employees and figure out how to locate them. And you are going to have to create new notices," said Andy Anderson, of counsel with Morgan, Lewis & Bockius L.L.P. in Chicago.

In addition, employers would have to notify terminated employees who opted for COBRA about the new subsidy, while notices also would have to be provided to employees who are laid off in the future.

Employers also would have to explain that beneficiaries who become eligible for coverage in a new employer's plan or for Medicare must inform the employer of that change, at which point the federal subsidy would end. Failure to do so could result in a penalty imposed on the beneficiary of 110% of the subsidy provided after eligibility ended.

Under the legislation, the beneficiary would directly pay his or her share of the reduced COBRA premium, while the employer would receive a credit as an offset to payroll taxes owed to the government for the rest.

Payroll systems would have to be modified to accommodate the changes.

Given all that faces them, employers should "start to think of all the administrative issues and be sure their staff and vendors are ready," said Mark Holloway, vp and director of compliance services at Lockton Benefit Group in Kansas City, Mo.

"You have to examine what needs to be done," said Tom Lerche, health care practice leader with Aon Consulting in Chicago.

And employers with lots of laid-off employees should prepare for higher health care costs. With the government paying about two-thirds of the premium, many more former employees would be expected to opt for COBRA. While the COBRA risk pool would improve, employers likely would still pay out more in claims than they will collect in premiums.

"In the aggregate, it will cost you more," said Rich Stover, a principal with Buck Consultants L.L.C. in Secaucus, N.J.

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