By 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:
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