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Can we pay for a former or current employee's COBRA coverage?

Yes, an employer can pay all or part of a former or current employee's COBRA premiums. Employers may do so as a means to assist an employee during a merger, acquisition, layoff, termination, temporary or permanent disability, retirement, or as part of a recruitment strategy. If an employer chooses to implement a practice of paying COBRA premiums, below are several ways to provide for these payments:

  • COBRA premiums may be paid to the employee, and the employee would pay the insurance company directly. Since there is no guarantee that the employee will use the funds to pay the premiums, the funds are considered wages and subject to applicable taxes.
  • An employer may reimburse premium payments the employee made directly to the insurance company. The employee must provide the employer with documentation verifying that payments to the insurer were made for the payments to be nontaxable and excluded from wages.
  • An employer may pay the premiums directly to the insurance company. These funds are nontaxable to the employee and excluded from wages.
  • An employer may provide funds for premiums under a severance plan. If the employer deducts the premiums from the severance pay and pays the insurer directly, the funds are excluded from wages and are nontaxable. If the employee receives the funds and can provide supporting documentation of the payment to the insurer, the funds are also nontaxable. If there is no verification that the employee used the funds to pay for the premiums, the amounts are included in wages and are taxable.

According to the IRS Employer's Tax Guide to Fringe Benefits, "the exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a current or former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary."

Paying COBRA premiums may benefit the employee and employer, but it may also raise some issues. For example:

  • Paying the COBRA premiums for a new employee might create a "plan" in and of itself, and should that employee terminate, the employer might have to offer COBRA for that "plan". However, the employer cannot realistically provide COBRA coverage that is identical to the coverage of another employer for the entire COBRA period. This could lead to litigation with the employee. Therefore, care needs to be taken to avoid creating a new ERISA/COBRA plan when paying for COBRA premiums.
  • An employer may agree to pay COBRA premiums directly to the insurer under a severance plan. If payments are untimely and COBRA is canceled, the former employee may claim a breach of contract.
  • If an employer agrees to pay the full COBRA premium for a former employee, the premium may increase if the employee becomes eligible for a disability extension.
  • Nondiscrimination rules under the IRS Code apply to self-insured plans, and payments made only to highly compensated individuals under self-insured plans may be taxable. Pending the release of guidance under the Patient Protection and Affordable Care Act (PPACA), nondiscrimination rules will apply to all group health plans. Once implemented, failure to comply may result in an excise tax, civil money penalty or civil action against an employer.

Paying COBRA premiums without clear communication of the arrangement may open the organization to liability; therefore, an employer may want to consult with legal counsel for guidance.


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