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An employer's worst nightmare? A terminated employee fails to be notified of their extended health insurance rights under COBRA, and then this uninsured former employee gets really sick. The employer is on the hook to pay all those uninsured medical bills.

Since California law applies COBRA to any company offering health insurance with more than two employees, many small companies hit with this liability would just have to shut their doors. If they weren't incorporated, the owner would be personally liable and would probably lose his or her home. After all, just a week in intensive care can cost $100,000 or more.

Meanwhile, the uninsured former employee can look forward to plenty of litigation before they can expect to squeeze any blood out of that rock. What a mess.

The fire wall to prevent this problem is an airtight monitoring program to make sure that all employees are adequately notified about their COBRA rights. What are COBRA rights? Basically, an employee who leaves a job has the right to continue paying, on their own, the cost of remaining on the employer's health insurance program for a period of up to 18 months.

The cost will be substantially higher than anything contributed as an employee, because the cost will no longer be shared in any way with the employer. However, the coverage is guaranteed, and the cost will typically be lower than any private individual insurance offering the same level of benefit.

COBRA related issues normally remain in the backwaters of the employee benefit world when the economy is strong. Most people just leave one job and go to another. But this time it's different. We have a weak job market, so larger numbers of terminated employees are unemployed for longer periods. Meanwhile, the demographic bubble of Boomers means that more people leaving jobs are in that donut hole of an age that makes insurance almost impossible to get. They are old enough to have acquired at least some health problem that makes them individually uninsurable --- but too young for Medicare. COBRA, for as long as it can last, can be a critical benefit for these recently-unemployed workers.

A new government subsidy can soften the blow. For coverage periods starting after Feb. 17th of this year, the maximum charge to a former employee is limited to 35 percent of the premium amount. The employer pays the difference, but they can be reimbursed by the government through a reduction of the company's payroll tax obligation. This subsidy only lasts for nine months, and it only applies to people who were laid off after September 1st of 2008, but at least it's something.

If a terminated employee fails to elect COBRA benefits, thinking they might not need the health insurance, they are taking a huge risk. Theoretically, they can go back and retroactively elect the coverage, but it only pays for bills going forward from the point at which they were approved. In the meantime, a serious health problem could have racked up a mid six-figure bill. An employee's only hope, in this situation, is that the employer failed to adequately notify them of their COBRA benefit. If the notification was non-existent, or inadequate, the employer is liable for all the costs.

Any employer would be wise to hire an outside company to monitor the COBRA requirements, but the devil is in the details. Outside administration company can be paid 2 percent of the health insurance premium amount to keep track of the notification requirements and ascertaining that mail was delivered. However, many of these services are not guaranteeing that they will assume the legal liability for delivery of notices. Contractual language makes them little more than junk mail delivery services.

The bottom line is that we are all subject to the possibility of falling through the cracks. We have watched some of the largest companies in the country be eviscerated overnight. Keeping health insurance alive between jobs protects all of our other assets. Employers, especially small employers, and any employee whose job is in jeopardy should take the time to know the ropes. When it comes to work, it's not about money anymore. It's about health insurance.

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