The current economic turbulence and uncertainty, caused in large part by the business reaction to COVID-19, has forced employers to rethink how they manage benefits for workers who suffer job loss (including—aside from termination of employment—layoffs, temporary furloughs, and leaves of absence). One of the key benefits (other than cash) provided to employees who suffer job loss is continued healthcare coverage.
Of course, COBRA gives terminated employees the ability to continue coverage generally for up to 18 months after a termination or reduction in hours of employment. However, COBRA coverage is costly—qualified beneficiaries must pay 102% of the full cost (employer and employee cost) of coverage. Congress is considering some type of legislated subsidy for COBRA coverage (as happened during the economic challenges in 2009). But for now, the cost of COBRA coverage is a big issue.
To ameliorate the impact of that cost, employers will sometimes offer limited periods of extended coverage as an alternative to COBRA coverage. From a technical perspective, when an employer wants to offer a more affordable alternative to COBRA coverage, the question arises on how to integrate that alternative option with the COBRA coverage rules.
There are two significant obstacles to advising employers in these situations: (1) The group health plan document (if there is one) is typically silent on the interplay between COBRA and alternative coverage; and (2) the available regulatory and case law guidance is not nearly specific enough. This column will summarize the possible approaches that employers may follow when dealing with alternative coverage situations.
What Is Alternative Coverage?
First, let’s understand what constitutes alternative coverage. Alternative coverage refers to any type of continued coverage after a qualifying event other than strict COBRA coverage. For example, if an employer offers subsidized or free continued coverage after a termination of employment (commonly done in severance pay plans), that subsidized coverage is “alternative” coverage. Sometimes an employer might offer a lower level of coverage as an alternative to COBRA coverage (which otherwise must be identical to the coverage in effect immediately before the qualifying event). In some cases, employers might even offer cash as an alternative to qualified beneficiaries electing COBRA coverage. Basically, any time an employer decides to offer qualified beneficiaries something other than (or in addition to) COBRA coverage, that is an “alternative” to COBRA coverage that must be structured consistently with applicable legal rules.
There are basically three ways to offer alternative coverage:
- A “choice method,” whereby the alternative coverage is an option in lieu of COBRA coverage—i.e., choose COBRA coverage or the alternative.
- A “consecutive coverage method,” whereby the alternative is offered in addition to COBRA coverage—i.e., you get COBRA plus an alternative coverage after the end of COBRA coverage (or you get COBRA coverage beginning at the end of the alternative coverage).
- A “concurrent coverage method,” whereby the alternative is integrated with COBRA coverage—e.g., you get free COBRA coverage for 6 months following a severance from employment plus another 12 months at full COBRA cost.
Alternative coverage scenarios occur in many different contexts. For example, a very typical alternative coverage scenario involves retiree medical coverage. Mandated leave of absence rules (by law or by contract) also may require certain alternatives to COBRA coverage. The discussion below explains the basic rules and considerations for providing some alternative coverage along with COBRA coverage and can help employers and administrators consider the options in their more specific cases.
Choice Method
To help their laid-off or ex-employees, some employers will offer a choice as an alternative to COBRA coverage. For example, a lower level of coverage might be available that could be more affordable. Another option is to offer terminated employees a more limited type of continued coverage—for example, the qualified beneficiary could take 6 months of free continued coverage in lieu of the full 18 months of COBRA coverage.
When offering a choice between COBRA coverage and something else, remember that the qualified beneficiary’s election is not effective until the end of the 60-day COBRA election period. Technically, a qualified beneficiary could agree to the alternative and reject COBRA only to change his or her mind within the 60-day COBRA election period. This is a particular issue during the COVID-19 period, during which the COBRA election period is open-ended until the end of the national emergency.
This ability to change one’s mind is a drawback to the choice method in the current environment. For example, if an employer offers cash payments in lieu of COBRA coverage (because some might value cash more than health coverage), a qualified beneficiary could take the cash and then turn around and decide to take COBRA coverage when it is needed several months later.
In considering cash as an alternative, beware of possible pitfalls:
- There are always tax considerations in offering individuals a choice between cash (a taxable benefit) and health coverage (a nontaxable benefit). It is possible to work around those issues, but employers need to be mindful of the tax rules when offering a “choice.”
- A separate issue arises under the Affordable Care Act (ACA) and the Employee Retirement Income Security Act (ERISA). In 2014, the government issued ACA FAQs explaining possible legal concerns when people are offered cash payments in lieu of health coverage. These FAQs pointed out some legal risks when cash is only offered to individuals with greater health claims; this design may constitute a prohibited form of discrimination against individuals based on their health status.
- The alternative coverage option becomes a new group health plan that is also subject to COBRA coverage if there are any future qualifying events during the period of alternative coverage. For example, assume a laid-off employee is offered a short-term coverage alternative to COBRA coverage. If that laid-off employee is divorced or dies during the short-term coverage, that second event is a new initial COBRA event resulting in 36 months of new COBRA coverage under the alternative coverage option.
Thus, before just offering an alternative coverage option, be sure to consider the long-term consequences.
Consecutive Coverage Method
The consecutive coverage method can happen two different ways.
- An employer offers continued coverage under an active employee group health plan for a limited period after termination or reduction in hours of employment. Then COBRA coverage would start after that continued coverage. For example, under a severance plan, active employee coverage might continue for a year, after which the employee is considered “terminated” and COBRA coverage commences.
In this type of consecutive coverage approach, the period of the “alternative” is just treated as if the employee were still actively employed. All the applicable COBRA notice and election periods are measured from the end of the alternative.
- Some employers will offer some type of coverage when COBRA is exhausted. In insured group health plan situations, this is done via “conversion coverage” options. Conversion coverage is individual coverage that is separate from the underlying group health plan. In rare situations, employers might offer some type of lesser group coverage to qualified beneficiaries. Again, that alternative coverage option, if part of a group health plan, is subject to future COBRA continuation coverage if there are future qualifying events. So careful planning is required.
Concurrent Coverage Method
The third general approach to dealing with alternative coverage scenarios is to count the period of alternative coverage toward satisfying the COBRA coverage obligation. This option is only available if the alternative coverage otherwise fully satisfies the requirement that COBRA coverage be identical to the coverage in effect immediately before the qualifying event.
A classic example of this approach occurs in severance plans in which a period of subsidized active employee coverage is extended and then counted against the overall COBRA obligation. For example, the severance plan might provide for 6 months of subsidized group health coverage, which then counts toward the COBRA coverage obligation of 18 months from the actual termination of employment.
One of the trickiest parts of administering the concurrent coverage method relates to coordinating COBRA notices to affected qualified beneficiaries. It is possible to provide COBRA notices at the time of the initial severance from employment and explain in the notices that the COBRA premium for the alternative coverage option is subsidized. Another approach is to provide COBRA notices after the end of the alternative coverage period and explain that the alternative coverage is counted as part of the overall COBRA coverage period.
Final Issues To Consider
In deciding how to administer alternative coverage and integrate it with COBRA coverage, here are some final considerations for each approach:
- Are the rules explained in your COBRA language in the group health plan document, summary plan description (SPD), and COBRA notices? It is recommended that these administrative rules be clearly articulated.
- Will your third-party COBRA administrator go along with your decisions? Some third-party COBRA administrators are not as willing as others to treat subsidized COBRA coverage as part of their COBRA administrative process. This is usually due to internal business decisions and not because the alternative approach is not legal. Therefore, it is important to make sure any third-party administrator will go along.
- Consider any applicable tax nondiscrimination rules applicable to self-funded group health plans. If alternative coverage is provided in a self-funded group health plan in a way that favors highly compensated individuals, there could be tax issues to consider.
- Remember that since last March, we have been in the COVID-19 pandemic, along with extended and open-ended election periods for COBRA coverage purposes. All the options for providing alternative coverage must be evaluated in light of the legal reality that until the pandemic is over, qualified beneficiaries will have their own options as to when to elect and pay for COBRA coverage.
Alternatives to COBRA coverage are used quite frequently and can be particularly helpful in times of economic uncertainty. By carefully considering the various methods for delivering the alternatives, employers and plan administrators can strike the right balance between design and legal compliance. Alternative coverage is explained in more detail in ¶1264 of Mandated Health Benefits—The COBRA Guide.
Paul M. Hamburger is co-chair of the Employee Benefits, Executive Compensation, and ERISA Litigation Practice Center and head of the Washington, D.C., office of law firm Proskauer Rose LLP. He is also a leader of the Practice Center’s health and welfare subgroup and a member of Proskauer’s Health Care Reform Task Force. Hamburger has more than 35 years of experience in advising employers and administrators and is the author of numerous articles and publications on COBRA and other employee benefits issues affecting pension and welfare plans. Hamburger is contributing editor of Mandated Health Benefits—the COBRA Guide and managing author of The New Health Care Reform Law: What Employers Need to Know (A Q&A Guide), 5th Edition.