COBRA Worries Cash-Poor Businesses Firms Must Pay Now, Wait for Reimbursement

Tower Automotive, a Livonia, Michigan-based automotive supplier, mailed more than 600 notices two weeks ago to employees who have been permanently laid off since September 1 to let them know they can purchase discounted COBRA health insurance coverage through the company.

It is part of the recently approved federal stimulus bill—the American Recovery and Reinvestment Act—that offers eligible terminated employees a 65 percent discount on COBRA coverage. Enacted in 1986, COBRA allows former employees to continue their health insurance coverage for up to 18 months after they are terminated.

The catch for employers is that they must pay 65 percent of the COBRA premium and then file for reimbursement through a payroll tax credit.

Employees pay the other 35 percent.

Some companies are worried the federal requirement could cause cash flow problems because of the up-to-three-month delay for reimbursement, said Sue Mathiesen, director of research at McGraw Wentworth, a Troy, Michigan-based employee benefits and consulting company.

“The big concern right now is how many people will elect this and where the money will come from,” said Jennifer Kluge, COO of the Warren, Michigan-based Michigan Business and Professional Association. “Going through payroll taxes to get reimbursed is OK, but it is not cash to pay the premiums.”

Kluge said cash flow problems could cause some financially strapped companies to lay off more employees, freeze or cut salaries, or eliminate group health coverage, dental, life insurance, disability and other benefits.

For example, if just 25 percent of the former employees at Tower choose COBRA coverage, the company could pay up to $2 million more in extra health care claims this year because it is self-insured, said Linda Willbrandt, Tower’s senior benefits analyst. Tower employs 2,400 workers in Michigan and some 8,000 across the U.S.

“This is going to be a huge financial burden, and we aren’t sure what the actual impact will be” until former employees decide whether to take COBRA, Willbrandt said. “This is at a time that manufacturing companies are looking at every penny.”

By April 18, employers are required to mail out the notices to eligible employees who have been laid off since September 1.

Employers who fail to notify terminated employees are subject to fines of $110 per day per former employee. The new regulation affects most companies with 20 or more employees.

“Identifying the employees and sending out the notices takes a lot of time and paper,” Willbrandt said.

The postage for the five-page notices costs more than $1,000, she said.

On top of the 600 laid-off employees, Tower was required to mail out an additional 350 notices to workers who had been temporarily laid off but who have returned and had their benefits reinstated, she said.

The coverage is retroactive until March 1. This means employees must pay their 35 percent share on three months of COBRA premiums through May, Mathiesen said.

“The first bill will be ugly, because anybody who previously waived their COBRA right can sign up and it will be a three-month bill,” said Bill Schoof, director of employee benefits with Michigan Financial Cos. in Southfield, Michigan.

Schoof said he expects more than 50 percent of eligible employees to accept COBRA benefits. The average COBRA take-up rate is about 20 percent.

“If the average premium for an individual is $400, and employees only pay 35 percent of that, they will pay about $150 a month,” Schoof said. “This is a lower premium than they can get anywhere else for coverage.”

But even with higher health care claims expected this year for larger companies such as Tower, smaller companies in Southeast Michigan with group coverage may face even worse financial and administrative pain.

“Companies let people go because business is not that great. They might be cash poor,” Kluge said. “And now they are being asked to give the federal government interest-free loans” for up to three months.

To help companies, Kluge said the association has offered to pay the estimated $15 per notice cost charged to their members by vendors or benefit administrators to identify and send out the COBRA notices.

At SmithGroup, a Detroit-based architecture and consulting firm, COBRA notices have been mailed to about 55 laid-off or terminated employees, said Edward Dodge, the company’s vice president of human resources.

While only one has elected COBRA coverage so far, Dodge said complying with the new COBRA regulations has taken extra time and administrative expense. SmithGroup employs 800 nationally.

“What we don’t know is if we file for the tax credits on a weekly basis or a quarterly basis,” Dodge said.

Carol Rito, compliance officer with Group Associates Inc. in Bingham Farms, Michigan, said large employers can file for COBRA tax credits on a monthly or weekly basis through their payroll tax deposit filings, depending on their arrangement with the IRS.

“Smaller companies that don’t have this arrangement have to file and pay on a quarterly basis,” Rito said. “This will be a burden.”

How the new COBRA rules work:
• The federal government will provide a 65 percent subsidy for up to nine months of the COBRA premium retroactive to March 1 for certain terminated employees.

• To be entitled to the subsidy, employees must have been involuntarily terminated between September 1, 2008, and December 31, 2009, and must be eligible for COBRA.

• A special election period exists for individuals involuntarily terminated on or after last September 1 who had not elected COBRA. They will have 60 more days after receiving the notice to elect coverage, which is retroactive to March 1 if they lost their jobs before then.

• The employer pays the 65 percent on the employee’s behalf and is then reimbursed through a payroll tax credit. Large companies may be reimbursed either weekly or monthly, but smaller employers must file for the credit with their quarterly payroll taxes.

• The employee must pay 35 percent of COBRA before the employer can request reimbursement of the other 65 percent. Employers that do not charge the full COBRA premium will not be entitled to reimbursement of 65 percent of the maximum COBRA premium.

For more information:

Tool: Resources for Keeping Up With COBRA Changes

U.S. Department of Labor at www.dol.gov/ebsa/cobra.html and the IRS at www.irs.gov/pub/irs-drop/n-09-27.pdf.

Filed by Jay Greene of Crain’s Detroit Business, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.