Question: Dear Alan: I was recently laid off from my job in pharmaceutical sales, and received a small severance. I signed up for COBRA healthcare continuation for my family. When the bill came, for family coverage all I had to pay for my entire family was $325 monthly. That is far less than I thought it would cost.

Concerned that there was a mistake, I called Human Resources, and was told that it was not the usual COBRA benefits, but “Subsidized” COBRA benefits. What does that mean?

Emy
Bozeman, Montana

Answer: Dear Emy: Good question, as many employees don’t know the difference, and many lose out because of this lack of knowledge. Let me do my best to explain.

a. The Federal “COBRA” law gives almost all laid off employees a right to remain on their employer’s health plan for up to 18 months. Almost everyone who is laid off or downsized in the U.S. is entitled to remain on their employer’s healthcare insurance plan under a federal law nicknamed “COBRA.” That is an acronym for the Consolidated Omnibus Budget Reconciliation Act of 1985. [For a full description of who is entitled to COBRA healthcare coverage, and on what conditions, you can review a previous post on this blogsite entitled “COBRA – The 21 Most Frequently Asked Questions.”]

b. COBRA does not pay your health premiums; it only permits you to remain on the employer’s healthcare plan if you pay the premiums, plus a 2% administrative charge to your former employer. COBRA does not pay any of your healthcare costs for you, but instead merely allows you to pay those costs – but to continue on your employer’s healthcare plan.

While some people may view this of limited value, most resigned or laid off employees view this right as a valuable one, because (a) often they have no substitute at the moment, (b) employer “group” plans are often more comprehensive and lower cost, and (c) as the coverage is already in place, and the procedures and cards familiar and available to their healthcare providers, among other reasons.

Don’t delay or miss deadlines on electing COBRA healthcare continuation. Use our Model COBRA Election Notice. It shows you “What to Say, and How to Say It™” just [click here.] Delivered Instantly By Email to Your Printer.

c. However, for many employees who either have been laid off, or who leave voluntarily but who nonetheless negotiate for themselves a severance packages, many employers agree to pay all or part of their COBRA healthcare premiums; this is called “subsidized” COBRA. While the COBRA law provides that payment of the healthcare premiums for former employees is the former employee’s own responsibility, it does not prohibit an employer from “pitching in” to assist in that cost, and many do so.

Why do they do this? There are many reasons, but usually it is an added inducement – over and above any severance payments – for the employee to sign his or her severance agreement and release.

d. Employer “subsidized” COBRA generally comes in three different types.

(i) The first type of subsidized COBRA is a “percentage subsidy” of the premium. Simply put, the employer says, “I will continue to pay or reimburse you for a certain percentage of your future COBRA healthcare premiums.” Quite often this percentage is the same percentage the employer previously paid while the employee was then employed.

For example, when an employee receives healthcare coverage from his or her employer, the employee usually has to pay only a part of that premium, and the employer pays the rest. The employee’s portion could be, for example, 55 percent, and the employer “chips in” the remaining 45%. In this example, the “percentage” COBRA subsidy would commonly be on that same 45% percentage basis.

(ii) In “time-based COBRA subsidy” of the former employee’s healthcare premium, the employer agrees to pay for the entire healthcare premium for a period of time, as for example, six months.

(iii) Sometimes, too, the employer agrees to provide a combination of both kinds of COBRA subsidy, namely, “We will pay or reimburse you (1) 75% of your COBRA healthcare premium, (2) for a period of 12 months.”

e. If you are laid off, or if, without being laid off, you are able top negotiate your severance, there is no downside to requesting “subsidized COBRA.” I often preach that, so long as (i) your request is respectful, (ii) your request is reasonable, and (iii) your request is accompanied by a good rationale, or reason behind it, then there is simply no downside to making a request.

One precaution I do suggest in severance negotiating, however, is that any request for more or better severance – including a request for “subsidized COBRA” – be accompanied by a statement along the lines of “I am not rejecting anything at all, just merely suggesting your consideration of this minor improvement in the terms of my package.” That should help prevent the employer from responding “This request constitutes a rejection of our offer, and for this reason our outstanding offer is off the table.”

Consider using our Model Memo to Request Subsidized COBRA in Severance. It shows you “What to Say, and How to Say It™” just [click here.] Delivered By Email – Instantly!

f. One thing to keep in mind: while employer-provided healthcare premiums for current employees are not taxable as income, employer-provided healthcare premiums for former employees are taxable as income. The law is clear: with just a very few exceptions, healthcare premiums are not taxable when provided by, or reimbursed by, employers to current employees. And, the law is just as clear: healthcare premiums provided to former employees is taxable.

Most commonly, former employees who receive “subsidized COBRA” will receive an IRS Form 1099 Misc at the end of the year showing additional income to that former employee in the amount of the employer COBRA subsidy.

[Please note that this is not to be considered tax advice, but instead merely the author’s recollection of his clients’ experiences over the years. On tax matters you are always counseled to consult your tax advisor.]

Emy, my thanks for writing in. Your email gave me the opportunity to explain something that many people do not fully understand. I hope this is helpful to you.

My Best,
Al Sklover 

P.S.: We also offer a 94-Point Master Severance Negotiation Checklist to make sure you don’t miss any severance-related issues or fail to spot problems in severance agreements. Sure reduces anxiety! To obtain a copy, just [ click here. ] Delivered By Email – Instantly!

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