Written in 2009 – Should a similar tax credit be available in the future . . . .
The Economic Stimulus Package contains a provision designed to allow laid off employees to retain their health insurance for nine months at a reduced rate. This provision provides an opportunity for employers to hire laid off employees and realize significant cost savings if they take certain steps now.
Prior to the Package the cost of continuing coverage under COBRA was 102% of the actual cost for the employer. Under the terms of the Package, qualified employees only pays 35% of the cost for the first 9 months of coverage. (Based on my read, the extra 2% can still be charged to the employee, but obviously the 65% difference is the critical issue.) The employer is able to take a direct tax credit for the 65%.
The good news for employees is that the somewhat prohibitive cost of continuing coverage becomes more reasonable. The total cost of continuing coverage for a family can easily exceed $1,500 a month – with the discount, the cost is much more affordable.
There is some good news for employers. Because of the prohibitively high cost, the population utilizing COBRA has always been adverse with many healthy employees taking the risk of going without coverage. At a more affordable price, the population taking coverage should be slightly more normal.
The best news for employers, however, relates to the savings that can be realized by NOT covering employees coming in who have the reduced COBRA rate available.
Take the following example of an employee’s coverage and monthly cost. John Doe, the employee works for ABC Company through April 30, 2009, is unemployed through July, and joins XYZ Company on August 1, 2009 (assume ABC and XYZ have identical plans):
Thursday, April 16, 2009
COBRA and the Stimulus Package – A Loophole for Recruiting
Now the key is to determine how XYZ can take advantage of the new provision when they hire John Doe. John would still have 5 months of discounted coverage which could be had for a total of $525 per month versus $1,500 per month. Ultimately, the right outcome may still be achieved because the government wants to see the rehire of laid off employees. XYZ can make it a win-win for the Company and the new employee.
The cleanest way for this to work is to have the employee continue on COBRA until the next open enrollment. This will not require a change in the plan documents – it just requires a simple handshake deal with the employee. After XYZ gathers the necessary information, the offer letter could include the following:
“If you agree to waive medical coverage under COBRA until the next open enrollment (January 1, 2010), the Company will pay you $800 per month in a bonus each month through the end of 2009. This bonus is for helping the Company to realize a cost savings – our intent is to allow you to keep your insurance coverage with your former employer at minimal cost to you.”
Joe Doe would be taxed on the $800, but even after taxes, the net check should cover his cost to continue coverage. He will have no health insurance costs through the ned of the year – a nice recruiting bonus – plus his family will not have to change plans or primary care physicians. At $800, XYZ saves $400 per month or $2,400 total.
Not major dollars, but in tough times a few thousand here and a few thousand there . . . eventually you have saved some real dollars.