Under the federal stimulus law enacted by the Obama Administration, employers in Illinois and elsewhere are required to front 65 percent of the cost of COBRA - continued insurance coverage - for laid-off employees but the dollars will return to employers via a subsidy.
The new provision - part of the American Recovery and Reinvestment Act of 2009 enacted in mid February - covers employees who lost their jobs between Sept. 1, 2008 and Dec. 31, 2009. The subsidy will pay for nine months' worth of COBRA benefits for laid-off workers who earned less than $125,000 and for couples whose adjusted gross income does not exceed $250,000.
Rather than receiving a subsidy check from the federal government, the employer will take a credit against payroll taxes and federal income taxes withheld from employees’ compensation. Employers will have to front the money for the premium payment, but only after the employee pays his or her 35 percent share. This system permits employers to recover the subsidy payments in the same month they are made. The estimated tax subsidy has a price tag for taxpayers of $25 billion.
For those who are eligible, there is no taxable income because the subsidy shouldn’t be included in gross income.
Mark Schuver, a shareholder with MMR&G Ltd. in Belleville, says employers are facing a significant communications and administrative challenge as they comply with the COBRA provisions, which took effect March 1.
"It's going to be a burden on employers," said Schuver. "Employers are obligated to provide special notice regarding this subsidy to anyone who is involuntarily terminated from their employment from Sept. 1, 2008 to the end of 2009. COBRA coverage is typically very expensive and is good for 18 months, so this employer subsidy covers half of that time period."
Historically, average COBRA premiums have exceeded $400 a month for individuals and more than $1,000 a month for families.
The law does not cover employees who left their jobs voluntarily.
In addition, Schuver says, laid-off employees' COBRA premium contributions will have to be adjusted to reflect the new subsidy.
Although employers are told they will be able to recoup the subsidy money they've paid within the same month by taking a credit on their next federal tax deposit, Schuver says it may still be a tough feat for companies already struggling with their cash flow.
"We've had a couple of clients who have been in shut-down mode anyway because of the economy," he said. "How the COBRA provision is going to affect them at this point, I don't know."
U.S. Rep. John Shimkus (R-Illinois) agrees that the COBRA subsidy could prove costly in the long run to employers.
"The COBRA portion of the stimulus is helpful to those who need the coverage, but we put the burden on employers who are facing tough times themselves right now," Shimkus said. "Again, if given more time for debate and discussion, maybe a better plan could have been constructed, such as directly paying the insurer versus reimbursing the employer."
Thomas E. Berry Jr., a shareholder with Sandberg, Phoenix & von Gontard P.C. in Edwardsville, says the objective of the employer COBRA subsidy is to help America's laid-off workforce, not to burden hirers.
"It's not meant to be a financial drain on employers," said Berry, "but it will be a financial drain on the economy."
The Obama Administration estimates that the COBRA subsidy could help as many as 8 million laid-off workers. But some businesses fear it could also raise employer healthcare costs. Critics contend the COBRA changes could, over the long term, encourage employers to discontinue coverage and harm employment. Greg Scandlen, a senior fellow at the Heartland Institute, a public policy research organization, is among them.
"It will make employer-sponsored healthcare costs go up if you have people staying on a COBRA policy for multiple years," Scandlen said. "It's going to have both an administrative cost and a direct premium cost on current employees, and you may see people drop coverage."
From the start, Scandlen says, COBRA has hiked health insurance costs for employers via a phenomenon known as "adverse selection." Since ex-employees must pay the full premium when they accept COBRA benefits, it is typically sicker people with higher healthcare costs who opt for it. Healthier ones can often find cheaper insurance on the individual market. This makes the pool of people in employer-provided insurance typically sicker than average, leading to higher costs.
"Also, the administrative burden of trying to keep track of workers and their families even decades after they work for you is huge," said Scandlen. "Employers are not set up to do that."
Mark Ugoretz, president of the ERISA (Employee Retirement Income Security Act) Industry Committee - an organization representing the employee benefits and compensation interests of employers - says the Obama Administration's COBRA changes will provide a disincentive for employers to keep employees who are near the 10-year mark or to hire new employees age 55 and older.
"I don't know to what extent employers would take COBRA into consideration for an employee with a lengthy term of service who is doing a good job," Ugoretz said. "COBRA coverage is the least-efficient and least-effective means of providing healthcare coverage to those who need it. The purpose of COBRA coverage is to prevent short-term coverage gaps so that employees who leave their job can, for a limited time, continue to be insured while they seek alternative, permanent coverage. The purpose is not - and should not be - to provide long-term coverage. We believe there are better ways," he added.
Congress passed the landmark Consolidated Omnibus Budget Reconciliation Act or COBRA health benefit provisions in 1986. The law amends the Employee Retirement Income Security Act, the Internal Revenue Code and the Public Health Service Act to provide continuation of group health coverage that otherwise would be terminated.
COBRA contains provisions giving certain former employees, retirees, spouses and dependent children the right to temporary continuation of health coverage at group rates. Group health coverage for COBRA participants is usually more expensive than health coverage for active employees, since usually the employer formerly paid a part of the premium. It is ordinarily less expensive, though, than individual health coverage. |
