cartoon businessman run away from vaccinationBy Dana Howells and Ben Conley

Post-termination medical coverage costs can be a powerful inducement for some employees losing their jobs to sign a separation agreement releasing legal claims. In the past, it has been common for employers to offer to pay all or part of the ex-employee’s COBRA premium for a fixed period of time, such as 3 months. With the Affordable Care Act and Covered California (the Golden State’s insurance marketplace) now part of the landscape, there are more options—but more complications.

Coverage through Covered California can be much less expensive than COBRA. But, there are key differences between traditional COBRA and Covered California that both ex-employees (making coverage choices) and employers (drafting separation agreements) should consider. Moreover, the Affordable Care Act prohibits, in almost every circumstance, employers from reimbursing employees for individual insurance premiums (for policies issued through Covered California or otherwise). Thus, an employer wishing to include payment for continued medical coverage as part of a severance package must consider whether it is willing to offer (i) payment or reimbursement for COBRA, or (ii) an unconditional cash payment that the employee can choose to apply to the cost of Covered California, or COBRA, or some other non-health care related purpose.

So how do the Affordable Care Act and Covered California impact separation agreements with a traditional COBRA reimbursement or subsidy feature?  Unlike some states, California embraced healthcare reform. California’s insurance exchange, Covered California, is on line, in storefronts and functioning. Anecdotally, paying for Covered California is potentially much cheaper than paying an ex-employee’s COBRA premium. (Both COBRA and Covered California plans qualify as coverage for avoiding the new tax penalties for failing to purchase coverage at all.)

But comparing COBRA to Covered California is like comparing a Washington apple to a California orange, especially when you are talking about potential gaps in coverage. This is virtually impossible to avoid when the event that triggers special enrollment in Covered California is loss of employer coverage. Consider the following:

  • Under COBRA, ex-employees have 60 days after a qualifying event to elect COBRA, then 45 days to pay the first premium. If a timely election is made, COBRA coverage is fully retroactive as if there was no interruption in coverage. Retroactively is not the case with Covered California. For the ex-employee who is about to have a procedure or needs a continuing doctor’s care, higher COBRA costs may be worth it to get uninterrupted coverage.
  • Under Covered California, a limited number of life changing events allow “special enrollment” in between annual open enrollments, including loss of employer coverage.  Like COBRA, there is a 60-day window to apply for and select a Covered California plan. However, coverage is prospective only. In general, the start date for Covered California coverage depends on the date of enrollment. For the ex-employee seeking to avoid a gap in coverage, the ideal situation would be termination before the 15th day of the month, where group insurance has been pre-paid through the end of the month in which termination occurs. Under those circumstances, if the ex-employee knows to enroll in Covered California promptly (before the 15th of the month), then the ex-employee should remain covered on the employer’s plan through the last day of the month and Covered California coverage will start on the first day of the following month. Unfortunately, this serendipitous confluence of events may not occur often in real life.  That being said, the regulatory agencies are considering changing the rules relating to health marketplaces (including Covered California) to allow for retroactive coverage in the event of a loss of employer-sponsored coverage, so stay tuned.
  • In addition, there are limits on moving between COBRA and Covered California. Ex-employees will want to know that if they decide to drop COBRA and enroll in a Covered California plan, they cannot change their mind and go back to COBRA. Moreover, ex-employees will not be eligible for special enrollment under Covered California if they stop paying their COBRA premiums or cancel COBRA. Once covered through COBRA, ex-employees will not be eligible for a special enrollment in Covered California unless:
  • A move out of the plan coverage area means there is no COBRA continuation coverage available, or
  • The COBRA participant has reached the group plan’s lifetime limit for benefits, or
  • A third party responsible for remitting payments for their COBRA premiums (for example, the former employer) fails to do so on a timely basis and the loss of coverage is beyond the employees’ control. (Note:  this rare (hopefully) circumstance is different from the more typical situation where, for example, an employer promises to pay 3 months of COBRA, the three months pass, and then payments stop. Canceling or failing to pay for COBRA after a fixed period of subsidy ends will not qualify the ex-employee for special enrollment in a Covered California plan.)

In addition, for the ex-employee, choosing between COBRA and a health insurance plan through Covered California means weighing such factors as:

  • The network of doctors and hospitals available in each plan
  • Total monthly premium for the ex-employee and dependents
  • Copays and deductibles
  • Tax credits to help pay for a Covered California health plan (Note: The Covered California website has a “Shop and Compare”  tool which can help estimate tax credit impact on the cost of a plan with Covered California).

What does this mean for employers seeking to assist ex-employees with their post-employment medical insurance needs?  Unfortunately, the time-honored practice of the employer paying, reimbursing or subsidizing COBRA premiums may force employees into electing more expensive COBRA, and risk creating gaps in coverage if they have to drop COBRA when they can no longer afford it (at least until a Covered California open enrollment period). Also unfortunately, the Affordable Care Act prohibits, in almost every circumstance, employers from reimbursing employees for individual insurance premiums (for policies issued through Covered California or otherwise). Giving employees a taxable fixed “allowance” which can be spent on COBRA or Covered California (or on things other than healthcare) is an option many employers will find unpalatable. If an employer does decide to provide a taxable fixed allowance as part of a separation agreement, employees who need medical insurance will need to choose carefully and spend their allowances wisely.