Furloughs, Layoffs and COBRA Options in a Time of COVID-19
We have seen many news stories of how the COVID-19 virus has impacted many employers, causing some to turn to significant reductions in their workforce via furloughs and layoffs. COBRA law and regulations are quite clear when a COBRA qualifying event occurs in the case of a furlough or layoff. Two specific conditions are required for employers with 20 or more employees (total employees, not participants in the group health plan): 1) a reduction in hours or termination of employment; and 2) a loss of group health coverage. Please note that this is not an either/or situation; both conditions must be present for the COBRA continuation of coverage requirements to kick in. For purposes of COBRA, the furloughs and layoffs are indistinguishable when they reduce the hours of a participant below the eligibility criteria in a group health plan that would result in a loss of coverage for that participant.
However, many employers are considering a little-known but very valuable opportunity within the COBRA regulations to assist affected employees in these most unusual times.
There is nothing in COBRA law or regulations prohibiting an employer from offering alternative coverage as an additional option to the required COBRA protections.
For example, Erewhon Restaurant has 25 employees and sponsors a group health plan, which requires participants to be full-time employees working on average 30 or more hours per week and to share in the premium cost by paying 20 percent on a pre-tax basis through a Section 125 Premium-Only Plan. John Doe, a participant in the plan is furloughed due to state and local restrictions on restaurants stemming from the COVID-19 pandemic. However, the owner of Erewhon wishes to continue John’s coverage under the health plan for up to three months at the current arrangement where the owner pays 80 percent of the premium and John the remaining 20 percent.
When John is furloughed and would lose eligibility for the group health plan, he has met both conditions for the requirement of a COBRA offer. And Erewhon’s outsourced COBRA vendor would normally send the regular COBRA qualifying event notice to John and any other of John’s qualified beneficiaries under the plan. But in addition, Erewhon could also send an offer of alternative coverage in lieu of COBRA: we will keep John and his other COBRA qualified beneficiaries enrolled in the group health plan for up to three months by having John paying 20 percent of the monthly premium instead of COBRA at 102 percent of the applicable premium.
This offered choice between both required COBRA continuation coverage and the alternative coverage fully or partially paid by the employer is allowable under IRS regulations.
Note that if John elects the alternative coverage offer in lieu of COBRA, within 60 days of the furlough date he could of course change his mind and switch to “regular” COBRA coverage instead of the alternative, as could each individual COBRA qualified beneficiary in his family. However, once the 60 day COBRA election window expires without John or his family members electing COBRA, COBRA is no longer an option.
Erewhon should most definitely check with its insurance carrier or stop-loss vendor to make sure the alternative coverage offer approach is viable. Our experience is that most all agree to that alternative coverage as it can significantly reduce risk exposure and adverse selection.
Bottom line: if an employer wishes to extend group health coverage at some employer cost to furloughed or laid off employees in these difficult times, there are options. A COBRA vendor well-versed in the minutiae of the law and regulations can help structure those options.