New COBRA subsidy helps former employees, bites business

Only a handful signed up to continue company-sponsored health insurance benefits after they were terminated. That’s expected to change when an insurance coverage provision of the new federal stimulus package starts Sunday.

Few people eligible for continued health coverage when they lose their jobs have taken it in the past due to the expense. Hoping to boost participation and stem the rising number of Americans without health insurance, the federal government will now pick up 65 percent of the cost for most laid-off workers and their families for up to nine months.

There’s no question the change is good for unemployed workers and the health of the community.

“When somebody loses their job through layoff, they are financially devastated,” said Emily Clayton, policy coordinator for the California Labor Federation. “This is the time they can least afford to take on what is a huge expense.”

Yet the new rule poses problems for employers because they have to front the cost and fuss with new administrative details at a time when staffing is down and margins are slim.

“The government is putting a lot of responsibility back on the employer, both financially and administratively,” said Norma Thomson, human resources manager at Folsom Lake Dodge. “Somehow, during this recession, it doesn’t seem just or fair.”

Some of the details remain unclear, including who is eligible for the program — and when employers will get their money back.

“I’m certainly concerned about people being laid off,” said Tom Sher, a broker with Driver Alliance Insurance Services Inc. in San Francisco. “But the impact on employers who couldn’t afford to keep them on board in the first place is now they have to pay more to the people they fired.”

Employers front the cost

Until now, employers were required to offer continued coverage under the Consolidated Omnibus Budget Reconciliation Act — better known as COBRA — but workers had to pay for it.

“There are a lot of reasons why people who lose their jobs lose coverage,” said Anthony Wright, executive director at Health Access, a consumer group in San Francisco. “For the average worker, it’s very difficult to pay 100 percent of the premium when you lose your job. This will help people.”

But for many employers, the financial burden of paying up front and waiting to be reimbursed will be tough to bear.

“It’s not just the fiscal cost of paying that percentage, it’s the whole cash-flow issue,” said Patrick Cummings, a broker with Felice Insurance in Sacramento. “It’s great the government is issuing a credit, but obviously banks are not giving loans, and making a contribution up front with the promise of a tax break is stressful.”

Premiums for company coverage of a single employee at Folsom Lake Dodge run about $300 a month. If all 50 of the staff laid off since Sept. 1 decide to take individual benefits under the new law, Folsom Lake Dodge will have to pay $8,775 a month.

If all of them want it for nine months, the amount grows to $78,975. If there are additional layoffs, the figure will go higher, and family coverage costs significantly more.

The company will get the money back. But when is uncertain.

Employers get a dollar-for-dollar credit against payroll taxes, but have to absorb the cost in the meantime. Most businesses, but not all, file quarterly raising the possibility of longer waits to recoup the money.

“There’s no clear answer about when the money will be returned,” said Scott Hauge, president of Small Business California, a small-business advocacy organization in the Bay Area. “One source said one time a year. If that’s true, that’s going to be a problem.”

Another issue that needs clarification is whether workers who face a possible layoff but voluntarily take a severance package qualify for subsidized COBRA benefits.

“Zinger questions,” said Vinny Catalano, area vice president at Gallagher Benefit Services and the broker for Folsom Lake Dodge. “(The feds) came out with rules, but they aren’t all that clear.”

Starts Sunday

The new requirements come when businesses are struggling with lean staffing, meager margins and little time to figure out what to do.

The effective date for most businesses is March 1, less than two weeks after the stimulus package was signed.

“It’s going to be a struggle to meet all these changes in a very short turnaround time,” said James Gelfand, senior manager for health policy at the U.S. Chamber of Commerce.

“There’s always going to be new administrative costs when you have new notice requirements, but now, it’s not just going forward, it’s retro to September. It’s going to create some nice job opportunities for benefits consultants — and that’s a stimulus.”

But the rule could have some unintended consequences.

Some employers pay a few months of COBRA coverage now to help laid-off workers or woo new ones who don’t qualify for benefits for awhile.

“Will we see that go away?” asked Jennifer Krengel, a labor lawyer at Downey Brand LLP in Sacramento. “The government is paying now, so why should I?”

While there’s some conjecture that the subsidy requirements will make some businesses think twice about layoffs, Krengel doesn’t see that happening.

Extended COBRA coverage could be a sign of more to come, some industry sources say. It reinforces the notion that health care coverage is important to the nation’s economy — and the Obama administration.