The Consolidated Omnibus Budget Reconciliation Act--better known as COBRA--protects an employee's right to continue healthcare coverage for a certain length of time--usually 18 months--after separation from an employer. Most employees have had to deal with COBRA at one point or another, but the status of employees can lead to emotional as well as financial issues. Particularly, when a business is family-owned, even a negotiated separation requires the employer to fully understand the details in order to ensure a smooth transition.
For example, consider a successful, closely held family business with multiple shareholders. One of the shareholders wants to retire at age 55 and have his interest bought out per the terms of the buy/sell agreement in place. Under COBRA, the normal length of continued healthcare coverage is 18 months. This leaves a gap of almost eight years (before Medicare eligibility) during which private insurance must be purchased. One way to bridge the gap is to keep the employee on the payroll for a minimum of 30 or 32 hours per week which continues their eligibility for group health insurance coverage. This approach allows the employee to avoid having to apply for COBRA and continues coverage for 10 years until he or she is eligible for Medicare Part A and B. This should be factored into the buyout price of the former shareholder and solves the gap problem.
Another option is arranging for the business to include cash compensation discounted to present value to pay for individual healthcare.
There will be times, however, when the current shareholders do not desire to keep the ex-employee on the payroll. The most obvious would be if the employee retiring is not a shareholder. Certainly, in this case, there is no buyout provision and the employer might choose to make a clean break with the employee. Even if the employee is a family member or shareholder, the other shareholders may still wish to exclude him from the payroll and from healthcare coverage. In that case, the ex-employee would have to take COBRA and then buy individual insurance after 18 months, or simply avoid COBRA altogether by purchasing individual insurance immediately.
But that's not always possible. A difficult-to-insure employee may be unwilling to negotiate a separation from the company. Advisors should explain healthcare details to their business-owner clients because it may be in their best interest to make healthcare part of a settlement.
For example, employers should know that 34 states offer state-sponsored risk pools which provide individuals or families with pre-existing medical conditions the opportunity to buy a special state-sponsored health insurance plan. Under this circumstance, the costs are often offset in part by assessments to health insurance carriers. Minnesota, for one, offers a solid plan with only slightly higher costs than the open market. Some other state plans, however, are under-funded and poorly planned, in which case they may not be the most attractive option although they may be the only option.
When ex-employees are healthy individuals and family members in their 50s or younger--and depending upon the demographics of the existing group--individual health insurance can actually compare competitively with a group plan. This is because these individuals are medically underwritten, and the insurance company knows they are covering a good risk at the present time. Problems can arise, however, in future years, when the insurance company raises their rates and/or a member of the family becomes uninsurable.
My home state of Connecticut, for instance, is one of the 34 states that offer the state-sponsored risk pool. Here are some options it offers for a 50-year-old male with family coverage:
Option 1 is offered by Healthnet and is an HMO plan which provides up to $1,000,000 in benefits during each covered person's lifetime. There is an out-of-pocket maximum of $5,000 per individual and $10,000 per family per year. The cost for a male age 50 is $957--the cost increases for a spouse and children.
Option 2 is a PPO plan offered by United Healthcare. It is less expensive but has high deductibles and co-insurance. This plan also provides up to $1,000,000 in benefits during each covered person's lifetime. For in network coverage, the annual deductible is $1,500 for an individual and $3,000 for a family. After the deductible is met, there is co-insurance of 80/20, with an out-of-pocket maximum of $7,500 for an individual and $15,000 for a family. The cost for a male age 50 is $802--and again, increases for spouse and family.
If family attachments or a negotiated separation become cost issues, a financial advisor has to look into a number of factors in addition to the dollar amount an employee will retire on and whether he or she can live comfortably in retirement for the rest of their life. A golden parachute won't stay aloft without serious consideration of COBRA--and pre-Medicare healthcare--as well.
Michael Radler is Senior Vice President of Mercury Wealth Management (www.mercurywm.com) in Avon, Conn.
