Employer Paid COBRA
"With employer paid COBRA, employers can negotiate how much of a COBRA premium they will cover and for how long and considering it would typically be offered on a tax-free basis, there’s an incentive for the former employee as well." Learn more about CobraHelp’s Premium Billing Service.
COBRA Premium & Potential Tax Issues
Up-Front Lump Payments for COBRA – The most common form of an employer paid severance is where the employer agrees to simply pay the carriers on the behalf of the former employee, as they do for their active employees. This would be an offering on a tax-free basis as mentioned previously in the introduction. What employees need to be weary of is when the severance is structured to where the employer offers the former employee an up-front lump of funds designated specifically to be used for COBRA payments (but doesn’t require proof that that’s what the participant is using it for). In that severance structure, the lump sum will be taxable to the employee as W-2 income.
Employer Paid COBRA: Certainly Generous, But Not Simple.
If Employer Pays Carrier Directly – If an employer agrees to pay a former employees COBRA by paying the carrier directly and those payments are late or aren’t made and the COBRA is terminated, the former employee could file for a breach of contract.
Partial Severances – It’s not uncommon for an employer to offer to pay the “Employer Portion” of the COBRA premiums and the participant would be responsible for the “Employee Portion” that used to come out of their paycheck. One issue that can arise from this severance structure is if neither party communicates who will be responsible for the 2% administration fee, one side could receive a bill for a different amount then what they were expecting.
Life Events – It’s important for an employer constructing a severance package for them to stipulate how the employer paid COBRA will work in the wake of a life event. For example, if a former employee had Single + Spouse coverage and the employer agreed to pay 12 months of COBRA and then 6 months in the participant has a newborn child, will the employer then be responsible to pay Family coverage the remaining 6 months? Or will the participant be responsible for the difference? Similar questions could be raised for an ex-spouse in the event of a divorce.
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