COBRA Subsidies and Reimbursement Part II: How COBRA Subsidies Can Prove Costly

Question: Why should terminated employees consider declining an offer of subsidized COBRA?

Short Answer: Loss of the COBRA subsidy is not a HIPAA special enrollment event to enroll in another employer’s plan mid-year. It may therefore be less costly for employees to immediately enroll in their new employer’s plan or a spouse’s plan because the subsequent full COBRA premium cost can outweigh the initial subsidized savings.

This is the second in a three-part series addressing COBRA subsidies and reimbursement.

• Part I: Avoiding Nondiscrimination Issues

General Rule: COBRA Qualifying Event for Continuation Coverage
Individuals have the right to continue group health plan coverage through COBRA upon experiencing a “qualifying event,” which is a loss of coverage caused by one of the prescribed COBRA triggering events (e.g., termination of employment). Individuals who experience a COBRA qualifying event are referred to as “qualified beneficiaries.”

• For more details: Newfront COBRA for Employers Guide

COBRA Subsidies: An Optional Employer Offering
Employers are generally permitted to charge qualified beneficiaries the full cost of coverage plus a 2% administrative fee to enroll in COBRA, often referred to as 102% of the applicable premium. Employers may choose whether and how to offer COBRA subsidies. Other than the rare situations where Congress has acted to temporarily require COBRA subsidies for an emergency (the Great Financial Crisis in 2009 and the COVID-19 pandemic in 2021), COBRA subsidies are completely optional.

Many employers choose to offer certain employees who lose coverage (typically due to termination of employment) a short duration of subsidized COBRA to defray some or all of the applicable premium. Employers can structure COBRA subsidies as a set percentage (e.g., 50% of the premium), an amount targeted to match the employer-share of the premium for active employees (i.e., the COBRA premium mirrors the active employee-share of the premium), as a fully subsidized approach to make COBRA free of charge, or anything in between. Most employers offering a COBRA subsidy do so only for a fraction of the (typically 18-month) maximum coverage period, such as for one, three, or six months.

Employers that choose to offer COBRA subsidies should be cautious to consider the potential nondiscrimination issues that can arise, particularly under Section 105(h) for self-insured (including level funded) plans. Employers sponsoring a self-insured plan often provide taxable compensation to avoid the nondiscrimination concerns associated with offering more generous COBRA subsidies to highly compensated individuals.

• For more details: COBRA Subsidies and Reimbursement Part I: Avoiding Nondiscrimination Issues

Should Employees Offered COBRA Subsidies Choose a New Employer’s or Spouse’s Plan Instead?
In some cases, employees who terminate employment have the option to enroll in a new employer’s plan, through a spouse’s employer, or both. If the prior employer is offering a COBRA subsidy, this can create a difficult choice for the employee losing coverage: Is it better to take the subsidized COBRA option or enroll in another employer’s plan?

The best approach depends on the employee’s specific facts and circumstances, but the most important piece is a proper understanding of what happens when the COBRA subsidies expire.

No Right to Enroll in Employer’s Plan Mid-Year Upon Loss of COBRA Subsidy Through Prior Employer
Terminating employees often would like to maintain their subsidized COBRA with the prior employer until it expires, then enroll in the new employer’s plan (or a spouse’s plan) mid-year upon losing the COBRA subsidy. Unfortunately, the rules do not provide employees the right to enroll mid-year upon loss of a COBRA subsidy.

The HIPAA Special Enrollment Events
Employees have the right to enroll in the plan mid-year upon experiencing a HIPAA special enrollment event. The following events qualify as HIPAA special enrollment events:

• Loss of eligibility for group health coverage or individual health insurance coverage;

• Loss of Medicaid/CHIP eligibility or becoming eligible for a state premium assistance subsidy under Medicaid/CHIP; and

• Acquisition of a new spouse or dependent by marriage, birth, adoption, or placement for adoption.

“Loss of eligibility” is defined broadly to incorporate many types of situations, including loss of coverage caused by divorce, legal separation, cessation of dependent status, death, termination of employment, reduction in hours, and where the plan no longer makes coverage available.

• For more details: HIPAA Special Enrollment Events

The “Loss of Eligibility” HIPAA Special Enrollment Event Does Not Include Loss of a COBRA Subsidy
“Loss of eligibility” for purposes of the right to enroll mid-year under the HIPAA special enrollment event rules is also defined to include two additional situations that can be the source of confusion in this area:

1. Exhaustion of the full COBRA maximum coverage period; and

2. Termination of employer contributions for active coverage.

With respect to exhaustion, the COBRA maximum coverage period is generally 18 months. An employee who exhausts that full 18-month maximum coverage period experiences a HIPAA special enrollment event and therefore has the right to enroll in another employer’s plan mid-year. However, the subsidized COBRA period offered by a prior employer almost always ends well before the 18-month maximum coverage period. Upon the loss of subsidized COBRA premiums, the employee has not exhausted the full maximum coverage period and therefore does not have the right to enroll in a new employer’s plan (or a spouse’s plan) mid-year.

With respect to terminating employer contributions, employees experience a HIPAA special enrollment event where an employer ceases providing any employer contribution for active coverage (i.e., not COBRA). This is an exceedingly rare event in practice given that most insurance carriers have a minimum employer contribution level, and most employers maintain a sufficient contribution level to meet the ACA affordability standards. Most importantly, this situation does not include termination of employer COBRA premium subsidies. The applicable rule explicitly limits this event to “coverage that is not COBRA continuation coverage.”

• Summary: While there are tangentially related situations that can cause employees to experience a HIPAA special enrollment event to enroll mid-year, loss of an employer COBRA subsidy prior to expiration of the full 18-month maximum coverage period (e.g., at the three or six-month mark) does not provide employees the right to enroll in another employer’s plan mid-year.

Choosing Subsidized COBRA Through a Prior Employer Can Prove More Costly
Although it may initially seem tempting for terminating employees to take the subsidized COBRA route where offered, it can prove to be a significantly more costly approach depending on multiple factors such as:

• When the period of subsidized COBRA ends in relation to the next available open enrollment period;

• The benefit and cost-sharing structure under both the prior and new employer’s (or spouse’s) plans;

• The employee-share of the premium for coverage under the new employer’s (or spouse’s) plan; and

• Continuity of care for any medical treatment plans in progress that are tied to a specific provider.

Given that the expiration of a COBRA subsidy does not create a mid-year enrollment right in a new employer’s plan (or spouse’s plan), those eligible for subsidized COBRA should consider the financial, coverage, and timing implications of continuing COBRA versus electing other available coverage options.

Example 1:

• Will Harris terminates employment in January with Whiskers Diner and is offered six months of fully subsidized COBRA (through July), after which the full COBRA premium of $600/month applies.

• He immediately takes a new job with the Vineland Thorns and is offered coverage under their plan as of March.

• If Will enrolls in the coverage through his new job, he will have to pay an employee-share of the premium of $150/month.

Result 1:

• If Will chooses to remain enrolled in the Whiskers Diner plan to take advantage of the six months of subsidized COBRA through July, he will not have the right to enroll in the Vineland Thorns plan in August.

• In that case, Will would be responsible for the full $600/month COBRA premium for the months of August – December before being able to enroll at open enrollment for his new employer plan, effective as of the following January.

• The COBRA premium cost for August – December would be $3,000 ($600 x 5 months).

• If Will chooses to forgo the six months of subsidized COBRA through his prior employer and instead enroll in the Vineland Thorns plan as a new hire upon becoming eligible in March, he will have to pay the $150/month employee-share of the premium for the remainder of the year.

• The employee-share of the premium for the Vineland Thorns plan over the course of the year would be $1,500 ($150 x 10 months).

In many situations (such as in Will’s example above), it can be significantly more expensive to take the subsidized COBRA offer because of the steep increase in the COBRA premium once the subsidies expire.

Employee Has the Right to Enroll in Individual Policy on the Exchange Upon Loss of COBRA Subsidy
Although employees do not have the right to enroll in an employer plan mid-year upon loss of a COBRA subsidy, they generally do have a 60-day special enrollment period to enroll mid-year in an individual policy on the Exchange (Marketplace) after losing a COBRA subsidy. The Exchange special enrollment regulations were updated in 2021 to include loss of employer COBRA subsidies as a triggering event.

• HealthCare.gov summarizes this right stating that individuals can “switch from COBRA to the Marketplace” if they “have to pay the full cost of COBRA coverage” because the “former employer stops contributing.”

• Covered California summarizes this right stating that an individual has a special enrollment period when “you stop receiving…employer contributions for your COBRA coverage.”

Example 2:

• Same as Example 1, but Will chooses the subsidized COBRA option not realizing the additional overall cost because he cannot enroll in the new employer’s plan upon loss of the subsidy.

• Will’s COBRA subsidy through the Whiskers Diner plan expires at the end of July and he has no ability to enroll in the Vineland Thorns plan until the next open enrollment period for coverage in January.

• He finds a suitable plan on the Exchange that is available for $500/month.

Result 2:

• Upon the loss of his COBRA subsidies, Will’s choices are a) to remain in COBRA at full price ($600/month), or b) enroll in the suitable individual policy on the Exchange ($500/month).

• Will chooses to enroll in the Exchange individual policy for August – December until he can enter his new employer’s plan at open enrollment for coverage in January.

• Although the Exchange coverage option still puts him at an overall loss compared to the total cost for the year if he had enrolled in the Vineland Thorns plan as a new hire, the individual policy does save $100/month compared to paying the full COBRA premium for the remaining months of the year.

• Note: Assuming the new hire offer of coverage from Vineland Thorns (that Will declined) was affordable and provided minimum value, Will cannot access the premium tax credit for his Exchange coverage.

Reminder: COBRA Rights May Terminate Upon Enrollment in Another Group Health Plan
Terminating employees offered COBRA subsidies might consider a dual coverage approach by enrolling in another employer’s plan while maintaining subsidized COBRA. Employees should be aware that COBRA can terminate early if the employee becomes covered under another group health plan after electing COBRA.

An employee who enrolls in a new employer’s plan (or spouse’s plan) prior to electing COBRA is not subject to early termination of COBRA. In other words, qualified beneficiaries who want to have other employer coverage and remain on COBRA must be careful to enroll in the other employer’s plan prior to electing COBRA.

Where the employee is able to both preserve subsidized COBRA and enroll in a new employer’s plan (or spouse’s plan), the standard coordination of benefits rules will generally apply. Under the NAIC Model COB Rules, the plan covering the person as an employee (i.e., active employee coverage through the new employer) is the primary plan, and the plan covering that same person through COBRA is the secondary plan. Where enrolling as a dependent through a spouse’s employer, COBRA is primary and the spouse’s plan is secondary.

For more details:

• Early Termination of COBRA Upon Enrollment in Another Group Health Plan

• Coordination of Benefits for Health Plans

Summary: No One-Size-Fits-All Best Approach
Terminating employees with access to a COBRA subsidy generally have two main choices:

1. Subsidized COBRA Followed by Full COBRA Premium or Exchange: Enroll in COBRA, and after the subsidized period ends either a) pay the full 102% of the COBRA premium, or b) enroll in an individual policy on the Exchange until the next open enrollment period for the new (or spouse’s) employer.

2. Decline COBRA to Enroll in the New Employer’s Plan or Spouse’s Plan: Instead of taking advantage of the period of subsidized COBRA through the prior employer, decline the COBRA option and enroll a) as a new hire upon becoming eligible with a new employer, or b) mid-year through a spouse’s plan.

No single approach works best in every situation. Terminating employees must weigh the specific circumstances such as timing, coverage, and cost issues for each option. The key (and often counterintuitive) point is that it may be in the employee’s best interest to decline the period of subsidized COBRA.

Relevant Cites:

29 CFR §2590.701-6(a)(3):
(ii) Termination of employer contributions. In the case of an employee or dependent who has coverage that is not COBRA continuation coverage, the conditions of this paragraph (a)(3)(ii) are satisfied at the time employer contributions towards the employee's or dependent's coverage terminate. Employer contributions include contributions by any current or former employer that was contributing to coverage for the employee or dependent. (iii) Exhaustion of COBRA continuation coverage. In the case of an employee or dependent who has coverage that is COBRA continuation coverage, the conditions of this paragraph (a)(3)(iii) are satisfied at the time the COBRA continuation coverage is exhausted. For purposes of this paragraph (a)(3)(iii), an individual who satisfies the conditions for special enrollment of paragraph (a)(3)(i) of this section, does not enroll, and instead elects and exhausts COBRA continuation coverage satisfies the conditions of this paragraph (a)(3)(iii). (Exhaustion of COBRA continuation coverage is defined in §2590.701-2.)

45 C.F.R. § 155.420:
(d) Triggering events. Subject to paragraphs (a)(3) through (5) of this section, as applicable, the Exchange must allow a qualified individual or enrollee, and, when specified below, his or her dependent, to enroll in or change from one QHP to another if one of the triggering events occur:
…
(15) The qualified individual or his or her dependent is enrolled in COBRA continuation coverage for which an employer is paying all or part of the premiums, or for which a government entity is providing subsidies, and the employer completely ceases its contributions to the qualified individual’s or dependent’s COBRA continuation coverage or government subsidies completely cease. The triggering event is the last day of the period for which COBRA continuation coverage is paid for or subsidized, in whole or in part, by an employer or government entity. For purposes of this paragraph, “COBRA continuation coverage” has the meaning provided for in § 144.103 of this subchapter and includes coverage under a similar State program.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).