Companies that have laid off workers in the past several months as a way to retain more cash may, paradoxically, suffer a near-term cash drain as a direct result of the layoffs.
Under the stimulus package signed into law on February 17, the government will pick up the tab for 65 percent of COBRA coverage for up to nine months for employees terminated involuntarily from last September 1 through the end of this year. But companies must float the payments to their health insurers and recover the money through a credit to their payroll taxes.
They are allowed to take the credit on their weekly payroll tax deposits, but for many companies that would pose an unacceptable administrative burden, benefits experts told CFO.com. If such a company were cash-strapped, it might have to scramble for capital in order to satisfy the law, and it wouldn’t get the money back until claiming a credit on its quarterly payroll tax return.
The biggest wallop could come soon. The law requires companies to notify employees eligible for COBRA coverage about the government subsidy by April 18, and gives those who previously elected not to participate in the extended-benefits program a second chance to sign up. (COBRA, short for the Consolidated Omnibus Budget Reconciliation Act of 1986, enables laid-off employees to remain part of their employer’s health plan largely at the employees’ expense. The presumption is that employees, through the benefits of group-insurance buying, will get a better deal on high-quality health benefits than they would be able to obtain in the individual-insurance market.)
Since under the new stimulus-law provisions laid-off workers would have to pay only 35 percent of what they otherwise would have owed for COBRA, many are likely to take the coverage, notes Rebecca Irish, managing partner for the Central and North Florida offices of Tatum LLC, which provides companies with senior finance executives on assignment.
How significant could the short-term outlay be? For a company that laid off 1,000 people, it potentially could be in the millions of dollars. If the COBRA monthly premium were, say, $1,000, the company would have to front $650 per month for each terminated employee who elected to take the coverage. If all did so, and the company elected not to claim a weekly credit against its payroll tax deposits, the float would be $650,000 for each month until the next quarterly payroll-tax filing. “Everybody’s in a tight liquidity situation as it is,” says Irish. “You’ll have to figure out how to get that $1 million in cash, on top of everything else that’s going on.”
Still, because they will be able to use money from their first payroll-tax credit to pay the health-care premiums in the next quarter, and so on, companies will bear the cash burden for no more than a quarter — unless they lay off more people. If they do, at least they would know that the expense is coming, unlike the many companies that reduced head count last fall. (The COBRA provisions in the stimulus law apply retroactively to layoffs made as of September 1.)
Smaller companies, which generally have proportionally smaller human-resources and benefits staff and are less likely to have an external COBRA administrator, are at greater risk of being caught short, adds Irish: “They may think it’s not going to cost much. There could be a blind-sided effect.”
Even companies that do have outside COBRA help will encounter “significant administrative challenges,” including incremental costs, according to Amy Bergner, an attorney and a principal at Mercer Consulting. Expenses will be incurred, for example, for notification mailings to eligible individuals and beneficiaries and changing systems to allow lower premium payments. And different COBRA administrators will charge different amounts to help with these activities.
Another task companies face is defining which employees were “involuntarily terminated” and thus eligible under the new plan. There is no guidance from the government yet about how to interpret that phrase, notes Bergner.
Also currently open to interpretation is the law’s stipulation that those opting for COBRA will pay 35 percent of what they otherwise would have owed. Some companies, as part of their severance packages, agree to pay a portion of the extended-benefits cost. Mercer is taking the language of the law to mean that if the monthly premium were $1,000 and the employer had agreed to pay half of that under the severance agreement, the ex-employee’s cost would be only 35 percent of $500, or $175.
Employers can, of course, elect not to provide that benefit for those laid off going forward. “This is causing a lot of companies to rethink their severance policies,” says Bregner.
Clients are also asking Mercer about the chances that the extended-benefits provision of the stimulus law might be extended beyond its current expiration date of December 31, 2009. That likely would depend on how much the number of people being laid off moderates by then, she says.
