COBRA subsidy puts more onus on employers

New rules likely burdensome, experts say

March 3, 2009 (published)
By Timothy Kirn

The government might have enacted new COBRA subsidies with the best of intentions, but they will be an administrative burden for small businesses like veterinary practices, some experts say.

"It is going to be time-consuming, and it is going to be expensive, and it is going to be onerous,” predicts Marsha Heinke, DVM, CPA and owner of a management consulting firm in Grafton, Ohio.

The federal government’s economic stimulus package, the American Recovery and Reinvestment Act of 2009, changed the rules of the COBRA program, which provides 18 months of continued medical insurance coverage for laid-off employees. Now most who receive COBRA coverage can get a 65-percent subsidy from the government for nine months, the new rules state.

The subsidy applies to anyone laid off between Sept. 1, 2008 and Dec. 13, 2009.

The problem is that employers who have let someone go are required to contact that person and inform them that the subsidy is available, even if the former employee previously declined COBRA medical insurance coverage. That means the employer needs to know or find out where that person is even if it takes some searching, experts say.

According to the legislation, the former employee is eligible for the subsidy starting in the first coverage period after Feb. 15. Employers have 60 days from mid-February to contact all employees who have been involuntarily terminated since Sept. 1 to tell them about the subsidy, according to the law.

What makes things worse, Heinke says, is that the government is going to reimburse employers using tax credits on end-of-quarter payroll tax returns.

The IRS released information to help employers understand the new system.

Until now, most veterinarians, as small employers, did not pay for COBRA. Instead, laid-off worker bore the cost of ongoing coverage if they elected for it, Heinke says. Those former veterinary employees who took it generally paid the practice or a COBRA administrator to continue their coverage on a month-to-month basis. In general, employers charge the maximum amount allowed by law: 100 percent of the premium plus a 2-percent surcharge to compensate for the administrative burden.

But according to the subsidy plan, laid-off employees now pay just 35 percent, and the former employer gets reimbursed via a payroll tax break. That means the employer now fronts 65 percent of the cost and waits for the government's reimbursement.

“Veterinarians now have to pay the money out of their cash flow, and their cash flow is already significantly challenged in the current economic crisis,” Heinke says.

Heinke and others expect that many who turned down COBRA coverage before because it was too expensive now might change their minds. The average cost of medical insurance is estimated at $400 a month for an individual and $1,200 a month for a family.

Moreover, sick individuals are going to be the most likely to accept the new deal, which could drive up premiums for some.

“All the people who opted out of COBRA before, they are going to be rethinking their decisions," Heinke predicts.

The federal COBRA law applies only to businesses with 20 or more employees. But Edward I. Leeds, an attorney who practices business law, notes that many states have their own COBRA laws to pick up employers with fewer employees, and that group would include many veterinary practices.

The legislation makes it clear that the subsidy applies to these businesses, based on the state's say-so. The only difference is that insurers will be responsible for carrying the 65-percent subsidy until they get reimbursed, not the former employer, says Leeds, of Philadelphia-based Ballard, Spahr, Andrews and Ingersoll, LLP.

While that makes it easier for employers, it does not mean they are spared administrative hassles that include contacting eligible former employees or possibly providing additional, more detailed information to insurance companies.

Their premiums, too, may go up, Leeds adds.

“In general, people who take the COBRA coverage are those people who need the coverage,” he says. “It will probably make premiums go up a little bit, but it is hard to say.”

The subsidy only applies to those who make less than $125,000 a year for an individual and less than $250,000 for a family.

Veterinarians may might to wait a few weeks, but then they should contact the insurers they work with — especially if they are affected by a state COBRA  — to find out what new requirements those insurers are going to have, Leeds advises.

“Probably the insurers are waiting for guidance right now. But come mid-March you might want to give them a call," he says.

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