If your small business has more than 20 employees and you’ve had to lay off workers recently, those workers can still receive health-care coverage and you can get reimbursed for providing it.
That’s the takeaway from a new provision of the American Rescue Plan Act — the stimulus bill signed by the president and enacted March 11 — and it’s a potentially huge benefit for workers who lost their jobs from the pandemic and their former employers.
For those workers, it provides free health coverage through Sept. 30. For employers it provides a way to fund these benefits and keeps the door open for laid-off employees to return to work (one hopes) as the economy improves.
How does this work?
To start, you have to understand the COBRA (Consolidated Omnibus Budget Reconciliation Act) rules, which date to 1985. Those rules require most companies to continue to offer their company’s health insurance to those workers — and their family members — when the worker was involuntarily laid off (or had hours reduced) for up to 18 months.
There are other qualifying events for COBRA, which include the death of the employee, a divorce or a change in the dependency of a child and, depending on these events, the covered period may extend as long as 36 months. The former workers are responsible for the premium payments.
Unfortunately, a lot of people were laid off this past year, and many could not afford to continue paying for their health insurance, even under COBRA.
But now there’s temporary relief: Employers would pay for the premiums starting April 1 through Sept. 30 and then get reimbursed by the government through a credit against their employer Medicare taxes paid each quarter on their federal payroll tax returns. If the credit exceeds the payroll taxes due, then that remaining amount is refundable to the employer. The premium payments would be tax free to the individual.
While this type of help is sorely needed for individuals who may have lost their coverage, it will create more headaches for some employers. Although there may be an opportunity to take these tax credits in advance (the rules are still being worked out), the premiums still have to be paid upfront before any tax refund is received, and this could cause cash flow challenges, particularly for a small business.
Ronnie Beth Stanley, a managing partner at Radnor’s Fairmount Benefits, also warns that providing “free” COBRA could also raise an employer’s costs in the long term.
“If the former employee receiving coverage is older, COBRA can potentially increase the company’s census age, which could increase their health-care rates at renewal,” she said. “We’ve found that often COBRA participants are higher utilizers of health care, and this could impact the employer’s cost at renewal.”
This coverage is open to former employees who previously failed to elect COBRA, discontinued their coverage, or have yet to elect it, but unfortunately for some individuals, the new legislation doesn’t allow for the extension of this coverage if it has already expired. Employers also have the option to allow former employees to switch plans. Businesses are required to notify former workers of their eligibility by the end of May, as well as what assistance is available and when these benefits terminate.
So, yes, the clock is ticking. And yes, more information is needed from the Department of Labor. But there are still plenty of things an employer should be doing now, including identifying those people who should be receiving notices and deciding on whether to allow those former employees to switch plans. There will be penalties if notices are sent out late.
“Now that the measure has passed, it will be up to the Department of Labor to provide guidance, so until that is complete the details are somewhat speculative,” said Rob DeNinno a principal at Precision Benefits Group in Philadelphia. “My advice to employers would be to reach out to their benefit consultant or broker for guidance to make sure they are complying.”
Gene Marks is a certified public accountant and the owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.