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With COBRA Subsidies, Consider this Potential Downside

With COBRA Subsidies, Consider this Potential Downside
Posted on Tuesday, April 7, 2020 by Sherri Bockhorst
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As the coronavirus continues to spread, a record number of Americans are losing their jobs along with their employer-sponsored health benefits.

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Some employers are helping people solve for their short-term need for healthcare coverage by subsidizing all or part of the cost of COBRA continuation coverage.

However, these subsidies generally end after some period, whether the employer is footing the whole bill or part of the cost for their former employee. These types of subsidies work well to bridge the time between someone being laid off and them getting a new position, presumably with benefits from their new employer.

With the uncertainty around the advance of COVID-19 and its impact on the economy and the job market, terminated employees may be facing the prospect of prolonged unemployment.

Or, they may be able to get a job with one of the companies that are currently hiring, but there’s no guarantee these positions come with benefits. Some of the jobs available right now are for temporary, part-time or contract work which helps with income but not with access to healthcare coverage.

In our current environment, it’s possible that many displaced employees may not have secured a new benefits-eligible position when their COBRA subsidy ends.

So, what are their options for healthcare coverage?

This is where the potential downside of the COBRA subsidy can become problematic for the former employee. Here’s why.

  • COBRA premiums are expensive. In 2019, employer-sponsored health coverage averaged $7,188 for an employee and $20,576 for a family. Active employees pay a portion of that, but COBRA participants pay 102% of the cost.

    That means that a person on COBRA will generally pay over $600 a month for single coverage and over $1,700 monthly for family coverage. For some people, this may make sense, especially if they are older or have met their deductible and accumulated a significant amount toward their out-of-pocket maximum. However, for others who are out of work, this may not be affordable.

  • Being on COBRA can limit access to other options. COBRA is just one of several options available to an employee who loses their coverage. A dependent losing coverage is a qualified life event, so they may be able to be covered as a dependent under a spouse’s, domestic partner’s or parent’s coverage. When their employer coverage ended, they would have access to a special enrollment period (SEP) for an ACA plan on the public marketplace or through access to a private exchange. Or, they could seek coverage with a short-term limited duration plan, which generally doesn’t have an SEP requirement.  

However, most of these options are available only on the initial loss of coverage, not when a COBRA subsidy ends leaving the employee to pay the full cost of the premiums themselves.

This is the important nuance: Non-payment of COBRA premiums does not create an enrollment opportunity that enables someone to gain coverage under another group health plan, an ACA plan on the public marketplace or an option on a private exchange.

If the employee cannot afford the COBRA premiums and their coverage lapses, their only option might be a short-term limited duration plan, which offers limited coverage at an affordable cost. However, these plans may not provide the level of comprehensive protection people want or need right now.  

Employers considering a COBRA subsidy during these COVID-19 layoffs need to understand the potential ramifications for their former employees when that subsidy ends. While it creates a temporary financial bridge and continued coverage, the subsidy may have the unintended consequence of preventing the former employee from having access to comprehensive, affordable healthcare options down the line when the subsidy ends.  

Additionally, some employees may qualify for a Premium Tax Credit for their marketplace coverage, further lowering the cost of the insurance purchased on the exchanges. By being ineligible to enroll in the marketplace plans, these COBRA participants are also ineligible for the Premium Tax Credit.

For employers looking to ease the impact of coverage loss for employees, there are alternatives. One option is a post-employment Health Reimbursement Arrangement (HRA). Using this type of HRA, the employer can offer funds the former employee can use to pay for coverage under COBRA, through the public marketplace, a private exchange or any publicly available option.

Using a post-employment HRA, the employer may enable the former employee to maintain affordable, comprehensive coverage for a longer period, something that is vital in these times of economic, health and job uncertainty.

Want more insights to help you navigate HR and benefits challenges in the time of COVID-19? Find additional resources below.

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