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The use of severance packages for terminating employees has become common practice for a lot of US employers.
They are often used to reward longstanding employees for their years of dedication to the company or more commonly to ease the transition of an involuntary termination. Usually the headliner in a severance package is the bundle of pay the former employer can expect to receive. That being said, an increasing number of employers are using employer paid COBRA as a severance negotiation tactic that adds another element beyond just a lump sum of funds. For any employers, and employees, that are currently participating in employer paid COBRA, or for those who may be in the future, there are a few things to keep in mind.
"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
Discriminatory Coverage in Self-Insured Plans – Whereas with fully-insured plans there are currently no tax consequences for employer paid severances but for self-insured plans the value of the COBRA premium(s) can be taxable to the former employee as W-2 compensation. For that reason, it’s important for employers to track their COBRA severance - both in frequency and dollar values of the offers - to ensure that they do not discriminate in favor of higher compensated former employees.
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.
Electing COBRA Still Mandatory – Perhaps the biggest issue we see with employer paid COBRA is the employer will reinstate or keep the former employee’s coverage active because they offered them a severance, even though the participant hasn’t even elected COBRA yet. Even if the employer has agreed to pay the participant’s premiums for a certain amount of time, coverage should not be reactivated until the participant actually elects COBRA. Find out more information about CobraHelp’s Election Tracking Service.
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.
The bottom line is that employer paid COBRA is not as black and white as it may appear. That’s why it’s important for the employer and the former employee to both have a detailed understanding of what exactly is being offered and what they should expect should any situation occur. Now of course having a COBRA TPA such as CobraHelp, who has seen it all, can go a long way in helping you navigate those tricky waters!
Have additional questions? Call today to learn more about our Employer services!
Author: Grant Ameel | CobraHelp Client Services Expert and Blogger
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