Question: We recently terminated an employee and offered her a severance package, which she accepted. Part of the package was that we agreed to pay for her insurance coverage through the end of the year.
We recently terminated an employee and offered her a severance package, which she accepted. Part of the package was that we agreed to pay for her insurance coverage through the end of the year.
What’s the best way for us to process this? Should we add the cost of the COBRA coverage to her final paycheck or severance payment and leave it all up to her to execute? Or can we pay the premiums to the carrier directly? Is there a better option than either of these?
The main issue here is whether your payment of the COBRA premiums would be considered taxable income to the employee. I am assuming you would prefer for the premiums to be treated as non-taxable (the same as when you pay premiums for active employees). There are a couple of ways for you to achieve that.
When an employer pays COBRA premiums directly to a terminated employee, the amount paid can generally be treated as non-taxable income. However, if you pay the employee directly with only an understanding that she will use the money to purchase COBRA coverage, and you don’t control or verify that she actually does so, then the payment would need to be included in her wages for employment tax purposes. To avoid this, you could either pay the premiums directly to the carrier or require the employee to provide proof that she actually has COBRA coverage for the remainder of the year.
This discussion only provides some general principles. I recommend you discuss the tax issues with your tax advisor or COBRA administrator if you have one.
