Offering to pay for a former employee’s COBRA premiums is a generous gesture, but it’s one that comes with surprising legal and financial traps. Many well-meaning employers believe that if they’re footing the bill, the administrative details are a mere formality. This is a costly assumption. Without following the strict rules for company paid COBRA severance, you could find your business liable for massive medical claims the insurance carrier refuses to cover. From sending the correct notices to structuring the agreement, every step is critical. This guide breaks down how to protect your business and ensure your severance package is a true benefit, not a hidden liability.

Key Takeaways

• Formal COBRA Election is Non-Negotiable: Even when your company pays the full premium, the former employee must complete the official COBRA election paperwork. This formal step is required to activate their coverage and is your primary protection against being held liable for their medical claims.
• Structure Your Agreement for Compliance and Clarity: Your severance agreement must clearly define the subsidy’s duration and terms. Pay the insurance carrier directly to avoid tax burdens for the employee, and apply the same subsidy policy to all departing staff to prevent discrimination claims.
• Get Written Approval from Your Insurance Carrier: Before promising to pay for COBRA, get your carrier’s consent in writing. Extending benefits without their approval can violate your group policy, leaving your company responsible for covering any claims the carrier denies.

What is Company-Paid COBRA in a Severance Package?

When an employee leaves your company, a severance package can help ensure a smooth and respectful transition. A key component of many severance agreements is the offer to pay for continued health insurance through COBRA. This can be a highly valued benefit for departing employees, giving them peace of mind while they search for their next opportunity. But as an employer, it’s critical to handle this process correctly to stay compliant and avoid unexpected costs.

Understanding how COBRA works within a severance agreement is the first step. It’s not just about agreeing to pay the premiums; it involves specific legal notices, timelines, and coordination with your insurance carrier. Getting these details right protects both your business and your former employee. Let’s break down the essentials of what COBRA is, who it covers, and for how long.

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How COBRA Continuation Coverage Works

COBRA, which stands for the Consolidated Omnibus Budget Reconciliation Act, is a federal law that applies to employers with 20 or more employees offering a group health plan. It gives workers and their families the right to continue their group health benefits for a limited time after a job loss, reduction in hours, or other specific “qualifying events.” When you include COBRA in a severance package, you are typically offering to pay the full premium on the former employee’s behalf for a set number of months, making it a powerful tool for a positive offboarding experience. This is a way to extend a crucial benefit beyond their last day of employment.

Understanding the Full Cost of COBRA

When you offer to pay for COBRA, you’re not just covering your usual portion of the premium. You’re responsible for the entire cost, which can be a significant jump from what you’re used to budgeting. The full COBRA premium includes the share the employee used to pay, the share your company paid, and a 2% administrative fee allowed by law. This means the total cost is 102% of the group plan’s rate. This is often a surprise for employers who haven’t managed a COBRA subsidy before. It’s essential to calculate this full amount accurately to understand the financial commitment you’re making in the severance agreement and to avoid any shortfalls when it’s time to pay the carrier.

The COBRA Election Process for Employees

This is a critical step that cannot be skipped. Even if you are paying 100% of the premium, the former employee must still receive and return the official COBRA election paperwork within their 60-day election period. Simply paying the premium on their behalf is not enough to activate their coverage. This formal election is what legally transfers the responsibility for claims from your company to the insurance carrier. Without this completed form, you could be held liable for the employee’s medical bills. It’s also vital that COBRA coverage begins the day after their active plan ends to ensure there are no gaps, which is a requirement for compliance. Managing these timelines and paperwork is exactly where having a dedicated partner can protect your business.

Who Qualifies for Coverage?

Eligibility for COBRA isn’t limited to just the employee. The coverage also extends to their family members who were on your health plan at the time of the qualifying event. This includes their spouse and any dependent children. So, if an employee and their family were covered under your company’s small group or large group plan before they left, they all have the right to elect COBRA continuation coverage. This ensures the entire family can maintain their health insurance without interruption, which is a significant relief during a period of transition.

How Long Does Coverage Last?

For a qualifying event like job loss, COBRA coverage typically lasts for up to 18 months. In other specific circumstances, such as the death of the employee or divorce, dependents may be eligible for up to 36 months of coverage. As part of a severance agreement, you might offer to pay for a portion of this period—say, three or six months. If you want to offer a subsidy for longer than the legally required 18 months, you must get written approval from your insurance carrier first. Without it, you could be held responsible for paying all of their medical claims out-of-pocket, which is a major financial risk you don’t want to take.

When Coverage Can Be Extended

While the standard COBRA period following a job loss is 18 months, certain situations can extend this timeline. For qualified beneficiaries like a spouse or dependent children, coverage can last up to 36 months if a second qualifying event occurs, such as the death of the former employee or a divorce. It’s important to understand these nuances, especially when structuring your severance agreement. If your company decides to offer a subsidy for a period longer than the standard 18 months, you must get written approval from your insurance carrier beforehand. Proceeding without their consent is a significant financial risk, as it could leave your business responsible for covering all medical claims out-of-pocket.

Reasons for Early Termination of Coverage

Just as coverage can be extended, it can also end sooner than expected. The full 18 or 36 months are not guaranteed if certain conditions are met. For instance, COBRA coverage will terminate early if the former employee fails to pay their premiums on time. It also ends if your company stops offering any group health plan to your current employees. Furthermore, if the individual secures a new job and becomes covered under another group health plan, their COBRA eligibility ceases. Finally, coverage will stop if they become eligible for Medicare after electing COBRA. Understanding these termination rules is crucial for managing your company’s obligations and communicating clearly with former employees. If you have more specific questions, our FAQ page is a great resource.

The Legal Side of Employer-Paid COBRA Severance

Offering to pay for a former employee’s COBRA premiums is a generous way to support them during a transition, but this gesture comes with a strict set of rules. It’s a common misconception that if you’re footing the bill, the administrative details take care of themselves. Unfortunately, that’s not the case. Simply paying the premium isn’t enough; you need to follow specific legal procedures to protect both the employee and your business. Failing to manage this process correctly can lead to significant financial liabilities, like being responsible for an employee’s massive medical bills if the insurance carrier denies a claim. To keep your severance offer compliant and effective, you need to handle notices, documentation, and fairness with precision. Think of it as a partnership: you offer the financial support, but the employee still has to complete their part of the process. From sending the right paperwork to getting your insurance carrier’s sign-off, each step is critical. Let’s walk through the essential rules you need to follow to ensure your COBRA subsidy is a benefit, not a liability.

Federal COBRA vs. State “Mini-COBRA” Laws

One of the first questions that comes up is, “Which rules do I even follow?” The answer depends entirely on the size of your company. If you have 20 or more employees, you fall under the federal COBRA law. This is the nationwide standard that gives former employees the right to continue their health benefits after leaving a job. But if your business is smaller, you’re not off the hook. Washington State has its own continuation law, often called a “mini-COBRA,” that applies to companies with fewer than 20 employees. This ensures that employees of small groups have similar protections. Knowing whether federal or state law governs your business is a critical first step in staying compliant when you offer a COBRA subsidy, as it dictates the specific notices and timelines you must follow.

Provide Timely and Proper Notice

Even when you’re covering 100% of the cost, the employee must still formally elect to receive COBRA coverage. Your offer to pay doesn’t automatically enroll them. They need to receive the official COBRA election notice and return the completed paperwork within the legal timeframe. If they fail to do this, the insurance carrier can rightfully deny their claims. This could leave your company responsible for their medical bills, completely defeating the purpose of the benefit. It’s critical to send all required COBRA notices and keep detailed records of when they were sent and when the employee returned their election forms.

Keep Your Paperwork in Perfect Order

Your severance agreement is a separate document from the official COBRA election notice. While your agreement can state that you will pay the premiums, it doesn’t replace the formal notice required by federal law. Be sure to review your health insurance policy to confirm the exact date an employee’s coverage terminates. This date is the starting point for the COBRA timeline, so getting it right is essential for compliance. Meticulous documentation is your best defense. Keep copies of all notices, election forms, and proofs of payment in the employee’s file. This paperwork is crucial for demonstrating you’ve met all your legal obligations.

Apply Your Policy Fairly to All Employees

When offering to subsidize COBRA, you must apply your policy consistently to avoid discrimination claims. This is especially important if your company has a self-funded health plan. Under Section 105(h) of the tax code, health benefits cannot unfairly favor highly compensated employees (HCEs). If you offer more generous COBRA subsidies to executives than to other staff, those subsidies could become taxable income for the HCEs. The best practice is to create a clear, uniform policy that applies to all departing employees in a similar situation. This ensures fairness and helps your business stay compliant with non-discrimination rules.

Always Get Your Insurance Provider’s Approval

Before you promise to pay for COBRA or extend coverage beyond the standard termination date, you must get written approval from your insurance carrier. Your group health policy is a contract with specific terms about who is covered and when that coverage ends. Making special arrangements for a former employee without the carrier’s consent could be a breach of that contract. If that unapproved individual later files a large claim, the carrier could refuse to pay it, leaving your company liable for the full amount. Always communicate with your broker or carrier first to ensure your plans are approved and your group health plan remains secure.

How Are COBRA Severance Payments Taxed?

Offering to pay for COBRA premiums is a generous gesture, but it comes with a few tax complexities for everyone involved. How you structure the payments can create different tax outcomes for your business, your former employees, and even your highest-paid team members. Getting this right is key to making sure your severance package is a true benefit, not a hidden headache. Let’s walk through what you need to know to handle the financial side of things smoothly and stay compliant.

Tax Rules for Highly Compensated Employees

It’s natural to want to provide extra support for senior leaders during a transition, but you have to be careful about fairness. If your company has a self-funded or level-funded health plan—meaning you pay for employee medical claims directly rather than paying a fixed premium to an insurer—you generally cannot offer better or longer COBRA subsidies exclusively to highly compensated employees. Doing so could be considered discriminatory. These rules are especially important for large groups that often use these types of funding arrangements. For businesses with fully insured plans, these specific non-discrimination rules are not currently enforced, but treating all departing employees equitably is always a good practice.

Defining a Highly Compensated Employee (HCE)

So, who exactly is considered a “highly compensated employee”? It’s not just a casual term for your top earners; it has a specific legal definition under the tax code that you need to know. Generally, an employee falls into the HCE category if they are one of the five highest-paid officers, a shareholder who owns more than 10% of the company, or among the top 25% of all employees based on compensation. Understanding this distinction is crucial because offering more generous COBRA subsidies to this group can trigger non-discrimination issues, particularly if you have a self-funded plan. If your severance policy is found to favor HCEs, the value of those extra benefits could become taxable income for them, creating an unexpected financial hit.

Tax Implications for Your Business

Severance agreements that include paying for future health coverage can be classified as “deferred compensation” by the IRS, which puts them under the strict and complex rules of Section 409A. Failing to structure your agreement correctly can lead to significant tax penalties for your business and the employee. To avoid this, you need to ensure your subsidy plan fits one of the exceptions. For example, one common approach is to structure the payments so they are completed by March 15 of the year after the employee leaves. Because the rules are so intricate, it’s wise to have an expert review your severance agreements to ensure they are compliant from the start.

How Taxes Affect Your Employees

The way you pay the COBRA subsidy directly impacts your former employee’s tax bill. If you pay the insurance carrier on their behalf or reimburse them after they provide proof of payment, the subsidy is typically not considered taxable income. However, if you simply give the employee a lump sum or periodic cash payments to cover the cost, that money is usually treated as taxable wages. This means it will be subject to income and payroll taxes, reducing the net amount the employee receives. Clearly communicating this is an important part of managing the employee’s transition with transparency and care.

Using Pre-Tax Severance for COBRA Premiums

What if an employee wants to use their severance pay for COBRA premiums before taxes are taken out? It’s possible, but there are a few hoops to jump through. First, your company’s Section 125 cafeteria plan must explicitly allow for it. If it does, the employee must provide written consent to have the premium amount deducted from their severance pay on a pre-tax basis. This can make their severance package feel more valuable since they’re using pre-tax dollars. Just be aware of the timing—these pre-tax payments generally can’t continue past the end of the calendar year of their termination. And to keep things fair and compliant, you must offer this option to all departing employees, not just your highly compensated ones, to avoid potential discrimination issues.

Tax Strategies for Self-Insured Health Plans

For businesses with a self-insured or level-funded health plan, the rules around COBRA subsidies get a bit stricter. These plans, which are common for many of the large groups we partner with, are subject to IRS non-discrimination rules under Section 105(h). In simple terms, you can’t offer a better COBRA deal—like a longer subsidy period or a higher payment amount—only to your executives or highly paid staff. If you do, those benefits could become taxable for them. The safest and smartest strategy is to create a uniform policy that outlines your COBRA subsidy for all departing employees in similar situations. This ensures everyone is treated fairly and keeps your company compliant.

How to Stay Compliant with Section 409A

We’ve mentioned Section 409A, and it’s worth circling back to because it’s a common compliance trap. These deferred compensation rules can be triggered by COBRA subsidies, especially if you offer to pay premiums beyond the standard 18-month COBRA period. The penalties for non-compliance are steep, so this isn’t an area for guesswork. While we can help you build a solid benefits strategy, the complexities of Section 409A require specialized legal knowledge. We always recommend consulting with an employee benefits attorney to review your severance agreements and ensure your COBRA subsidy plan is structured to avoid any issues. It’s a critical step in protecting both your business and your departing employees.

How to Structure Your COBRA Severance Agreement

When you decide to offer employer-paid COBRA as part of a severance package, a well-structured agreement is your best friend. This document is more than just a formality; it’s a clear, written record that protects both your business and your former employee from future misunderstandings. Think of it as a roadmap that outlines everyone’s responsibilities and expectations during the transition period. A vague agreement can lead to confusion, compliance headaches, and even legal trouble.

By taking the time to draft a thorough and precise agreement, you ensure that the terms of the COBRA subsidy are crystal clear. This includes specifying exactly how long you’ll pay the premiums, who is covered, and what happens if the former employee gets a new job with health benefits. A strong agreement also clarifies that this subsidy runs alongside their official COBRA rights, not in place of them. Getting these details right from the start helps create a smoother, more respectful offboarding process and keeps your business on solid legal ground. We can help you get started with a plan that fits your company’s needs.

What to Include in Your Agreement

Your COBRA severance agreement should be straightforward and leave no room for interpretation. At a minimum, it needs to cover three core areas. First, clearly define the payment terms for the premium subsidy. Second, specify the exact details of the coverage, including its duration. Finally, outline the rules for early termination of the subsidy. Each of these components works together to create a comprehensive document that clearly communicates the benefit you’re offering and ensures you remain compliant. Think of these as the essential building blocks for a fair and legally sound agreement.

Be Clear About Premium Payment Terms

This is where you need to be incredibly specific. Your agreement must spell out exactly when the COBRA subsidy begins and ends. It should also detail any conditions the employee must meet to qualify, such as formally electing COBRA coverage and paying their portion of the premium, if any. Be sure to clarify the scope of the subsidy—does it cover just the employee, or does it extend to their spouse and dependents? Clearly defining these premium payment terms upfront prevents confusion and sets clear expectations for everyone involved from day one.

Outline the Specifics of Coverage

Clarity on the duration of the subsidy is crucial. Your agreement should state precisely how long your company will pay for COBRA premiums. This period typically runs concurrently with the former employee’s COBRA eligibility window, which can be 18, 29, or 36 months, depending on their qualifying event. For example, you might agree to pay the full premium for the first six months of their 18-month eligibility period. Detailing the exact post-employment benefit timeline helps former employees plan for the future and understand the full value of their severance package.

What Happens if Coverage Ends Early?

It’s important to explain what happens if circumstances change. The agreement must state that the subsidy ends if the former employee becomes eligible for another group health plan (like from a new job) or Medicare. You should also clarify that if they choose to end their COBRA coverage early, the subsidy payments stop. Make it clear that this severance agreement does not replace the official COBRA election notices. This ensures employees understand that terminating coverage means they may have to wait until the next open enrollment period to get a new plan.

Navigating COBRA Alongside Other Health Plans

COBRA doesn’t operate in a bubble. It interacts with other health insurance options in ways that can be confusing for both you and your employees. For a departing team member, making the right choice in the 60-day election window is critical, as some decisions can lock them into a plan for months. For your business, you might encounter new hires who are still on their previous employer’s COBRA plan and need to bridge a coverage gap. Understanding these scenarios helps you provide accurate guidance during offboarding and create a smoother onboarding experience for new talent. It’s all about knowing the rules of the road so you can support your team effectively at every stage of their employment journey.

A Warning About Switching from COBRA to an ACA Plan

One of the most important pieces of advice you can share with a departing employee is about the “COBRA trap.” If they elect and pay for COBRA, they generally cannot switch to a Health Insurance Marketplace (ACA) plan until the next annual open enrollment period. Simply dropping COBRA coverage mid-year does not count as a qualifying life event that would grant them a special enrollment window. This makes their initial decision incredibly important. They have a 60-day window to explore all their options before committing to the high cost of COBRA, because once they’re in, they’re usually in for the long haul.

Reimbursing New Hires for Their Previous COBRA Costs

Sometimes, a new employee has a waiting period before they can join your company’s health plan. To prevent a gap in their coverage, you might offer to reimburse them for the COBRA premiums from their old job. This is a great perk and, thankfully, it’s compliant with ACA rules. Because COBRA is a continuation of group coverage and not an individual policy, reimbursing these premiums doesn’t create the compliance issues that can arise from reimbursing individual plan premiums. It’s a simple, effective way to support a new team member and ensure they have continuous health coverage from day one.

Alternatives to COBRA Your Former Employees Should Consider

While offering to subsidize COBRA is a generous benefit, it’s important for former employees to know it’s not their only choice. In fact, COBRA is often the most expensive path to continued coverage. Losing job-based health insurance is what’s known as a Qualifying Life Event, which opens a special 60-day window for them to enroll in a different health plan. Sharing these alternatives is a powerful way to support them during their transition. It empowers them to find a solution that fits their budget and their family’s needs, whether that’s a marketplace plan, a spouse’s plan, or a state program.

Using a Qualifying Life Event for Special Enrollment

The moment an employee loses their job-based health insurance, a clock starts ticking on a Special Enrollment Period. This is triggered by what the industry calls a Qualifying Life Event (QLE). This QLE gives them 60 days to enroll in a new health plan outside of the standard open enrollment season. It’s their ticket to exploring other, potentially more affordable, options instead of defaulting to COBRA. Understanding that they have this special window to act is the first step toward making an informed decision about their health coverage after leaving your company.

Affordable Care Act (ACA) Marketplace Plans

For many people, plans on the ACA Marketplace are a more affordable alternative to COBRA, especially if they qualify for a premium tax credit. The key is to compare costs during their 60-day special enrollment window. They can even use COBRA as a safety net. An employee can wait to see if they need medical care during those 60 days. If a major health issue comes up, even on day 59, they can retroactively elect COBRA, pay the back-premiums, and have their expenses covered. If not, they can simply enroll in a more affordable ACA plan.

Joining a Spouse’s Health Plan

If your former employee has a spouse with their own job-based health insurance, this is often one of the simplest and most cost-effective solutions. The loss of coverage from your company is a Qualifying Life Event that allows their spouse to add them and any dependents to their plan, even if it’s outside the normal open enrollment period. They typically have 30 or 60 days from the date of the job loss to make this change. It’s a straightforward option that provides the stability of a group plan without the high price tag that usually comes with COBRA.

State-Based Programs like Medicaid

For former employees whose income is significantly reduced after leaving their job, state-based programs can be a critical lifeline. In Washington, this program is called Apple Health, which is our state’s version of Medicaid. Eligibility is based on household income, and it provides comprehensive coverage at little to no cost for those who qualify. It’s always worth encouraging departing employees to check their eligibility, as it can provide essential health security for them and their families during a financially uncertain time. This is an important part of the full spectrum of coverage options available to them.

Don’t Fall for These COBRA Severance Myths

Offering COBRA as part of a severance package is a great way to support departing employees, but it’s an area filled with compliance traps and misconceptions. Let’s clear up some of the most common myths so you can structure your agreements with confidence and avoid costly mistakes. Getting these details right protects both your business and your former employees, ensuring a smooth and fair transition for everyone involved.

The Real Deal on Coverage Gaps

A frequent point of confusion is when COBRA coverage must begin. Some employers believe they can offer a subsidy that starts a few months after termination, but this isn’t compliant. The rule is simple: COBRA coverage must be continuous. It has to pick up the very next day after the employee’s active health insurance plan ends, leaving no gaps in coverage. For example, if an employee’s last day is September 30th, their COBRA coverage must be effective starting October 1st, even if you agree to pay the premium starting in December. Failing to ensure continuous coverage can create significant legal and financial risks for your company.

Can You Selectively Subsidize Premiums?

It might seem practical to offer COBRA subsidies only to certain executives or highly compensated employees (HCEs), but this can lead to serious tax problems. Tax rules, specifically Section 105(h), are designed to prevent discrimination in benefits. If your company has a self-funded health plan, providing subsidies that unfairly favor your top earners can cause those payments to become taxable income for them. The goal is to treat employees equitably. If you’re considering different severance structures for various employee levels, it’s crucial to understand how these non-discrimination rules apply to your specific group health plan.

What Really Counts as Proper Notice?

Simply including a clause about COBRA in your severance agreement is not enough to fulfill your legal obligations. This is a critical mistake many businesses make. You are still required to send a formal, separate COBRA election notice to the qualified employee within the legally mandated timeframe. The severance agreement can outline the terms of your subsidy offer, but it does not replace the official notice that informs employees of their rights and how to enroll. Think of the severance agreement as the “what” (what you’re offering) and the election notice as the “how” (how they can officially accept it).

The Truth About Treating Employees Equally

Building on the idea of selective subsidies, the principle of fairness applies to all aspects of your COBRA offer. If you have a self-insured plan, you must offer COBRA subsidies consistently to all departing employees in similar situations. Giving larger subsidies or more favorable terms only to HCEs can backfire, potentially making the benefit taxable for them and creating compliance issues for you. The safest approach is to create a standardized policy that applies to all eligible employees. This ensures you’re not only compliant but also fostering goodwill and maintaining a reputation as a fair employer, which is a core part of why businesses choose us to help manage their benefits.

Putting Your COBRA Severance Policy into Action

Once you have a handle on the legal and tax rules, putting your COBRA severance policy into practice is the next step. A solid implementation plan protects your business and gives former employees much-needed clarity during a transitional period. It’s about being proactive, not reactive. By establishing clear procedures, you can manage severance benefits smoothly and confidently, ensuring everything is handled correctly from the start. These best practices will help you build a framework that is fair, compliant, and easy to manage for everyone involved.

Start with a Clear, Written Policy

Your first step is to create a formal, written policy. Ambiguity is your enemy here, so be as specific as possible. Your policy should clearly state how long the company will subsidize COBRA premiums. This period should align with the former employee’s total COBRA eligibility, whether that’s 18, 29, or 36 months. Putting this in writing creates a consistent standard for all departing employees, which is crucial for fairness and helps you avoid potential discrimination claims. Think of it as your playbook—it ensures everyone on your team follows the same rules and provides a clear reference if questions come up. If you’re just getting started with formalizing your benefits, this is a foundational document to create.

How to Communicate Your Policy to Employees

Clear and compassionate communication is essential when an employee is leaving. The severance agreement itself should be straightforward and easy to understand. It’s always a good idea to have an attorney specializing in employee benefits review your agreements to ensure they are legally sound. When discussing the agreement, explain the COBRA subsidy terms clearly and give the former employee ample time to review the document and ask questions. Providing a human touch can make a significant difference. Having a dedicated benefits expert to walk them through their options can help demystify the process and show that you genuinely care about their transition.

Create a Simple and Reliable Payment Process

Deciding how you’ll handle premium payments is a critical detail with significant tax implications. If you pay the subsidy directly to the former employee as part of their severance pay, that money is typically taxed as income. A more tax-efficient method is to pay the insurance carrier directly on their behalf. Alternatively, you can reimburse the employee after they provide proof of payment. This direct-payment or reimbursement approach ensures the funds are used for their intended purpose and are not considered taxable income for the employee. This small administrative choice can make a big financial difference for your former team members and simplifies your own accounting.

Keep Detailed Records of Everything

Careful record-keeping is non-negotiable. You must document everything related to the COBRA severance offer, including all notices sent, employee elections, and proof of premium payments. These records are your defense in case of a dispute or audit. Without proper documentation, an insurance or stop-loss carrier could refuse to pay claims, potentially leaving your company responsible for enormous medical bills. Think of it as your compliance safety net. Partnering with an agency that helps you manage benefits administration can take this burden off your plate, ensuring every detail is tracked accurately and your business remains protected.

Avoiding Risks with Employer-Paid COBRA Severance

Offering to pay for COBRA in a severance package is a generous move, but it comes with serious compliance responsibilities. Missteps, even unintentional ones, can expose your business to significant financial and legal risks. The key is to be proactive and understand the rules before you make an offer. From ensuring employees complete the right paperwork to getting your insurance carrier’s approval, every detail matters. By focusing on these four key areas, you can protect your company, treat your departing employees fairly, and avoid costly compliance headaches down the road.

Protect Your Business from Financial Liability

One of the biggest mistakes a company can make is assuming that paying for COBRA premiums means you can skip the formal election process. Even if you cover 100% of the cost, the former employee must officially elect COBRA coverage and complete all the required paperwork. If they don’t, your insurance carrier could deny their claims, leaving your company responsible for their medical bills. Imagine being on the hook for a major surgery because a form wasn’t signed. Following the proper election process is non-negotiable and protects your business from potentially massive, unexpected expenses.

Steer Clear of Discrimination Claims

When structuring your COBRA subsidy, fairness is essential, especially if you have a self-funded health plan. Tax rules, specifically Section 105(h), prevent companies from offering benefits that unfairly favor highly compensated employees. If you offer larger or longer subsidies only to your executives, those subsidies could be considered taxable income for them. To stay compliant and avoid creating tax problems for your key people, the simplest approach is to offer the same COBRA subsidy terms to all departing employees, regardless of their position or salary. This ensures you’re treating everyone equitably and staying on the right side of the law.

Work Closely with Your Insurance Carrier

Your group health policy is a contract with specific terms. Extending benefits to a terminated employee, even if you’re paying for it, can be seen as a violation of that contract if you don’t get permission first. Before you promise to keep an employee on the active plan or extend COBRA beyond the legally required period, you must get written approval from your insurance carrier or stop-loss provider. Without it, the carrier could refuse to cover the employee’s claims. This is where having a dedicated partner helps; we can manage these communications to ensure your severance offer is fully compliant with your policy.

Double-Check Your Documentation Requirements

A verbal agreement isn’t enough. Your severance agreement must clearly and thoroughly detail the COBRA subsidy. Ambiguity can lead to misunderstandings and legal disputes later on. The agreement should explicitly state the subsidy amount, its duration, what coverage it applies to (medical, dental, vision), how it will be paid, and any conditions that would cause it to end early. Putting everything in writing creates a clear record that protects both you and your former employee. As your benefits partner, we help you ensure your documentation is airtight, which is one of the top reasons companies choose to work with us.

Washington State COBRA Resources

Washington State employers structuring COBRA into severance packages need to comply with both federal ERISA requirements and Washington employment law. Federal COBRA applies to businesses with 20 or more employees, but Washington’s insurance code under RCW 48.21.250 requires insurers to offer continuation options on group health policies regardless of employer size. Additionally, RCW 48.21.260 provides conversion rights so departing employees can transition to individual coverage when the group plan ends.

For Washington employers offering COBRA as part of a severance agreement, getting the tax treatment and documentation right is essential. The subsidy structure (direct payment vs. reimbursement) affects both your company’s tax obligations and the employee’s taxable income. The Washington Office of the Insurance Commissioner can provide guidance on the state-level insurance requirements, while your legal and benefits advisor should ensure ERISA compliance for the federally governed plan. Departing employees may also explore coverage through Washington Healthplanfinder as an alternative to employer-subsidized COBRA.

Whether you manage a small group or large group benefits program, WHIA helps Washington businesses navigate the complexity of COBRA severance packages, from structuring compliant agreements to managing ongoing premium payments. We work with businesses of 20 to 300 employees across Washington State to reduce administrative burden and protect your company from compliance risk. Need help managing COBRA for your Washington State business? Talk to WHIA: 833.292.8844 or get started here.

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Frequently Asked Questions

My severance agreement says we’ll pay for COBRA. Isn’t that enough notice for the employee? No, it’s not. Think of the severance agreement as a separate promise that outlines your company’s financial commitment. The official COBRA election notice is a legally required document that explains the former employee’s rights and provides the formal paperwork they must complete to enroll. Even if you are paying 100% of the premium, the employee still has to officially elect coverage. Failing to send the separate, formal notice can put your company at significant financial risk.

What’s the most tax-friendly way to pay the COBRA premiums for our former employee? The best approach is to pay the insurance carrier directly on the employee’s behalf or to reimburse the employee after they show you proof of payment. If you simply give them a lump sum or add the money to their severance check, the IRS generally treats it as taxable income. This means the employee loses a portion to taxes. Paying the carrier directly ensures the full amount goes toward their health coverage and is not considered taxable income for them.

What happens if we agree to pay for six months of COBRA, but the employee gets a new job with health benefits after two months? Your obligation to pay the subsidy typically ends as soon as the former employee becomes eligible for another group health plan. Your severance agreement should clearly state this as a condition for early termination of the payments. Once they are covered by their new employer, they are no longer eligible for COBRA, and your subsidy payments should stop.

Why can’t I just keep a departing employee on our active health plan for a few months instead of dealing with COBRA? Keeping a former employee on your active plan after their termination date without your insurance carrier’s explicit written permission is a major risk. It can be considered a breach of your contract with the carrier. If that person files a large medical claim during that time, the insurer could refuse to pay it, leaving your company responsible for the entire bill. The COBRA process exists specifically to manage this transition legally and safely.

If I offer to pay for an employee’s COBRA, do they have to accept it? No, the employee is not required to accept your offer. They have the right to decline COBRA coverage altogether, even if you are willing to pay for it. They might choose to get coverage through a spouse’s plan, the healthcare marketplace, or a new employer. Your responsibility is to make the offer correctly and send all the required legal notices; the final decision to enroll rests with the former employee.