Employers may choose to assist employees with health coverage costs following a termination of employment, reduction in hours, leave of absence, or other loss of eligibility events.

Assistance is often provided through a COBRA premium subsidy, but employers may also consider other approaches such as cash payments, severance enhancements, extended active coverage, or health reimbursement arrangements (HRAs).

Before implementing any subsidy arrangement, employers should consider the administrative, tax, nondiscrimination, and compliance implications to ensure that assistance achieves the employer's objectives while minimizing unintended consequences.

Subsidy Structure

Employers have significant flexibility in designing COBRA premium assistance programs. For example, an employer may pay the full COBRA premium, subsidize a fixed dollar amount, or pay a percentage of the premium.

Assistance may also be offered for a specified period, reduced over time, or conditioned on certain events.

Employers can pay the carrier directly or reimburse the COBRA participant for COBRA premiums paid. The chosen approach should be carefully coordinated with the COBRA administrator, if applicable, to ensure proper administration and documentation.

COBRA Administration & Paperwork

Even when an employer intends to pay some or all of the COBRA premium, standard COBRA administration procedures should continue. Qualified beneficiaries must receive required COBRA notices and retain their normal election rights and deadlines.

Subsidy terms should be documented in writing and clearly address:

• Individuals eligible for premium assistance (e.g., employee, spouse, and dependents);
• The amount and duration of the subsidy; and
• When responsibility for the full COBRA premium shifts to the COBRA participant

Tax Treatment

The tax treatment of COBRA employer subsidies generally depends on how the assistance is provided.

Employer assistance is typically not taxable to the COBRA participant when:

• The employer pays COBRA premiums directly;
• The employer reimburses COBRA premium payments made by the COBRA participant; or
• A self-funded or level funded plan waives some or all of the COBRA premium otherwise due

In contrast, unrestricted cash payments or severance enhancements are generally taxable wages, even if the recipient uses the funds to purchase health coverage.

Nondiscrimination Rules

When COBRA assistance is offered only to select employees on a tax-favored basis, employers should review applicable nondiscrimination rules.

• For self-funded or level funded health plans, §105(h) nondiscrimination rules restrict arrangements that favor highly compensated individuals with respect to eligibility or benefits. For COBRA participants who were highly compensated while employed, it may be necessary to tax the employer COBRA subsidy to avoid violating §105(h) rules.
• Fully insured group health plans are not subject to the same nondiscrimination rules and therefore could favor former highly compensated employees via tax-favored COBRA subsidies so long as the COBRA participant’s contributions are not handled pre-tax through the employer’s cafeteria plan.

Potential Consequences

If the employer subsidy does not extend through the entire COBRA maximum period of coverage, it is important to consider the qualified beneficiary’s options once the employer subsidy ends.

The end of an employer subsidy for COBRA will trigger a special enrollment period through the public Marketplace. However, the end of an employer subsidy (or voluntary early termination of COBRA) will not trigger a HIPAA special enrollment right to enroll mid-year in another employer-sponsored group health plan.

By contrast, exhaustion of the COBRA maximum coverage period ordinarily provides a HIPAA special enrollment right. Voluntary early cancellation of coverage or a change in cost generally does not. As a result, individuals whose subsidy expires before their COBRA coverage ends may find that Marketplace coverage is available immediately, while enrollment in another employer-sponsored plan may need to wait until the next available enrollment opportunity (open enrollment).

Alternative Arrangements

A COBRA subsidy is only one option available to assist former employees with health coverage costs. Potential alternatives include:

• Continue active coverage for a limited period, provided the plan’s eligibility rules must allow continued coverage and the carrier or stop-loss vendor will cover claims (e.g., retiree coverage);
• Offer reimbursement for premiums of other medical cost-sharing (e.g., via an HRA);
• Offer additional taxable compensation or increase severance pay that can be used for any purpose, including health coverage

In many cases, additional taxable compensation can be one of the simplest approaches because it avoids administrative complexities and allows more flexibility for the individual to use the money as needed.

Some employers offer alternatives in exchange for declining COBRA coverage. These arrangements should be reviewed carefully to ensure that COBRA rights are protected and that any waiver of rights is legally effective.

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