Employer Paying COBRA Premiums for a Former Employee

Updated as of July 19, 2024

An employer may pay COBRA premiums on behalf of a former employee. The following are some considerations regarding this practice.

Has there been a Qualifying Event in order to trigger COBRA continuation of coverage rights?

• There must be a loss of coverage that occurs as a result of one of seven events approved by the statute. A termination of employment or reduction in hours that results in loss of group health plan coverage is a COBRA qualified event (please see COBRA Cheat Sheet).

What are the tax implications of paying COBRA premiums on behalf of the former employee?

• Federal: Excluded from income tax for amounts paid to maintain medical coverage for a former employee under COBRA. This applies whether the employer pays the premium directly to the insurer or the employer reimburses the former employee for premiums paid.
• FICA Tax: If the employer pays COBRA premiums for the former employee directly to the insurer, then the payment would not be wages for purposes of FICA. However, if the employee has control over the money (i.e., the employee purchases the insurance and the employer exercises no control over the purchase), then the amount is likely income for purposes of FICA taxes.

Documentation and COBRA Election

• When the employer agrees to pay COBRA premiums on behalf of an employee (and any other qualified beneficiaries), they should put the agreement in writing and include the timeframe that the employer agrees to pay COBRA premiums. Additionally, the employer should still treat the employee in a manner consistent with standard COBRA election practices. This will ensure that a COBRA election is made, and the clock starts ticking on the duration of coverage. Problems are likely to arise if the employer fails to provide the COBRA election notice to the employee within the timeframe of qualified event.

Precedent

• The employer should also consider that they are likely setting a precedent by offering to pay COBRA premiums for an employee. Upon termination, other employees may request the same treatment. An employer should review their policies prior to implementing such a practice.

Coordination with the Marketplace

• Employers may have a practice of paying COBRA premiums on behalf of a former employee during a severance period (e.g., the employer pays 6 months of the former employee’s COBRA premiums). If the former employee elects COBRA under this type of arrangement, once the employer’s payment obligation ends, the individual is responsible for the entire COBRA premium and he or she would not be eligible to enroll in the Marketplace until the earlier of the Marketplace annual enrollment or the exhaustion of COBRA (unless there is a subsequent qualifying life event). Thus, structuring severance in this manner may bind the former employee to more costly COBRA coverage than what he or she could have obtained in the Marketplace had he or she declined COBRA.

Self-Insured Medical/Dental/Vision Plan Considerations

• There are additional considerations if the group health plan is self-insured or a non-grandfathered plan. If the plan is self-insured and the individual receiving the COBRA payment from the employer is a highly compensated employee under Section 105, an employer may have a nondiscrimination problem and the benefits may become taxable income. Under section 105, a self-insured plan may not discriminate in favor of highly compensated employees (HCE) as to eligibility to participate in the plan or benefits under the plan.
• The term highly compensated employee is defined as:
  • One of the 5 highest paid officers
  • A shareholder with more than 10% value of the employer’s stock; or
  • Among the highest paid 25% of all employees

An employer who pays the COBRA premium for a HCE would not likely pass the benefits test under Section 105 if they did not pay COBRA premiums for non-HCEs.