Leaving a job comes with a range of considerations, health insurance is almost always among them. Some employers extend a helping hand by offering to pay for COBRA, providing departing employees with continued access to their current health plan. However, the way this assistance is provided—whether as a lump sum of cash or direct payment to the insurer—brings an additional set of considerations.

First of all, if you’re being offered some kind of assistance with COBRA payments at all, you’re in the minority. You’ve likely just left an employer that is actively trying to build a culture that values its employees, is trying to incentivize you to speak highly of them, or you’re just a really valuable employee that managed to negotiate a sweet heart deal for an exit. The vast majority of folks don’t get anything like this when they depart. But what does it mean that they’re “paying for COBRA?”

The lump sum severance

Some employers say they're "covering COBRA" but will actually just choose to offer a lump sum severance package that includes funds for health insurance. While this may appear as a financial windfall at first, it's essential to consider the tax implications. The lump sum is typically taxed as regular income, potentially reducing the net amount you receive and, depending on where you are in terms of tax brackets, could move you into a less favorable tax position. It’s important to understand the implications of an employer’s offer.

One nice thing about having it done this way is that, once you get paid, there’s really nothing an employer can do to make sure that you spend your money in any particular way. So they might have a line item for COBRA or health insurance in the severance agreement and that number may even be based on how much it would cost for you to elect COBRA, but once that money is taxed as regular income and handed to you as regular pay, you can really do whatever you want to with it. If that means purchasing COBRA because you like the coverage and the cost makes sense, then great, that sounds like a good solution for you. However, you could also decide to explore other options like the marketplace or other private insurance to see if you can find a better price and insurance plans with similar or even better value.

The biggest downside to this arrangement is definitely the tax piece though. So imagine, for the sake of illustration, that your employer has a line item for COBRA and says that it will cost you $1,000 per month. So they’re going to give you six months of COBRA and they calculate it as $6,000. The issue is that, assuming you get taxed at 30%, you’re actually going to get $4,200 after taxes which really will only cover you for 4 months. Now you see why this method may not give you the full value you’re looking for.

Direct employer paid COBRA

Alternatively, some employers will decide to directly pay for COBRA coverage on behalf of departing employee. This option has the advantage of being tax-free, as the employer handles the premium costs directly. However, it's essential to understand the duration of this support and any potential limitations. If you secure a new job before the COBRA severance period ends, you might transition to your new employer's health plan, potentially missing out on the full financial benefit.

Again, for illustrative purposes, let’s say that same employer tells you that they want to pay for 6 months of health insurance and now, instead of handing you $6,000 less taxes, they’re going to actually pay for 6 full months of COBRA coverage directly. You end up with a lot more value than you would have with the previous option and it actually ends up costing the employer less as well as they don’t have to pay any payroll taxes on top of the lump sum payment they were giving you previously.

If you anticipate securing a new job promptly, however, carefully consider the timing of your employer's COBRA assistance. If you transition to a new employer with health insurance benefits before the full COBRA severance period concludes, you might not fully utilize the financial support provided. Perhaps, if you’re still negotiating with the employer on your severance, you could suggest that they pay directly and that if you get employed before the COBRA payments are up, they’ll give you the difference in a lump sum payment that’s taxed as regular income. Of course, you should consult with an employment law attorney and maybe also your financial expert before just taking that advice but it helps illustrate how different approaches really can end up with very different outcomes.

Ultimately, the decision between a lump sum severance and direct employer payment for COBRA hinges on your unique situation and preferences. Assess your short-term and long-term health insurance needs, anticipate your job search duration, and the overall financial impact in order to make an informed decision.

At Kept, we're here to help you navigate these choices. Our professionals can assist you in understanding the implications, comparing options, and making decisions that suit your unique situation. Your health coverage decisions are as individual as you are, and we're here to support you in securing the best possible outcome.