Butler: COBRA can bite workers, employers

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.

`Like a mosquito in a nudist colony’

What a great time to be young – and employed. The dichotomy of recessions is that people tend to get increases in pay if they are fortunate enough to avoid layoff. While the world is going to hell in a hand basket, employers may reduce head count, but they are inclined to increase pay for those who stay on and are absorbing more of the workload. When the chips are down, smart employers don’t want to lose people they can count on.

In 2008, average pay increased by 4 percent across the country. While the media harp on the large number of the newly unemployed, as a percentage of America’s workforce, it is relatively small. “Full employment is defined as the point when only 5 percent of the workforce is unemployed. If we are approaching 10 percent unemployment today, then its only 5 percent above the norm. In other words, 95 percent of those usually employed still have jobs and on average they are making more money.

For young people with jobs, life is better today than it has been in the last five years. For one thing, they can buy homes today for about half of what they might have paid two years ago. Need mortgage money? It’s available at historically low interest rates. Stocks and mutual funds? Same thing. Need to splurge just a little? EBay and Craigslist offer a cornucopia of “stuff” at a fraction of what new consumer goods were selling for before the economic crisis. Want to go somewhere? Check out this Travelocity package: I just spent three nights in New York City at a medium-priced hotel, and the round-trip airfare on Jet Blue was free. What’s to not like about a combination of pay increases and half-price sales?

So, things are not as bad as they sound. In general, businesses are still making money — just not as much as before. Business owners or managers are preparing for the worst, of course, so they are quick to cut marginal employees in preparation for what might become a downturn that actually impacts them. They’re thinking: “even paranoids can have real enemies.” The reality is that gross domestic product actually increased over the year in 2008, and the average company made more money last year than they did in 2007.

There are certainly pockets of despair, but only 3 percent of the American workforce is employed in the financial sector. The homebuilding industry employs five times the number of people in the automobile industry, and clearly both industries are hurting. But then, there’s everyone else, and for the most part they are working for companies that are having a reasonably good year — considering.

Warren Buffett just pointed out that the economy was in shambles and would be in turmoil for awhile. That didn’t mean that stocks were not a good buy, however. Given today’s opportunities, he says he feels “like a mosquito in a nudist colony.”

Stocks get pummeled, in part, by a new round of redemptions from hedge funds. Investors, spooked by the proliferation of “Ponzi schemes,” are suddenly sensitive to the fact most hedge funds just give their clients a simple sheet of paper every quarter saying only what the earnings or losses were. No backup. No nothing. Who knows? But, as Warren Buffett reminds us, “When the tide goes out, you see who’s not wearing a bathing suit.” I say, “Mix those metaphors and bring on the mosquitoes.”

Since October, over $1 trillion dollars has left an industry of hedge fund wise guys that lost an average of 19 percent — an average that fails to count all those that lost everything and went out of business. What this means to the “little people” like you and me is that the supply of stocks for sale overwhelms the demand and drives down the value. This further disconnects the value of stocks from the intrinsic value of the companies they represent. How disconnected? The dividend alone from General Electric now represents a 15 percent return on the current share price.

Bottom line? It’s an opportune time to be young with a lot of investment years ahead. A struggling economy offers a great chance to purchase investments at substantial discounts. Apply a little discipline now, and when the market turns around, you’ll feel like a genius.

From the ashes, a new SEC attitude

Help is on the way. At the Securities Exchange Commission, Mary Shapiro replaces Christopher Cox, the former Orange County U.S. representative who ran the agency into the ground.

Apart from the fact that there were unfilled vacancies on the commission for a good part of the Cox era, we are now learning that SEC policy was to allow no legal action to move forward without express approval from the handful of commissioners on the board. Considering that there were typically about 700,000 whistleblower reports per year that warranted at least a follow up, this sounds to me like a deliberately broken system — the “less is more” school carried to a perverted extreme.

Those days are over. The new commissioner is moving forward at warp speed appointing people to positions that remained unfilled for months under the previous administration. My favorite appointee is Kayla Gillian, former CALPERS counsel, who engaged in a squabble with Commissioner Cox a year ago when she was with the Public Company Accounting Oversight Board. Seeing itself as the handmaiden of corporate management, the SEC was swatting away attempts at accounting board oversight. Those CPA concerns might just as well have been some 700,000 mosquitoes.

One of Gillian’s first orders of business will be to lead a new investor advisory council and explore practical ways to empower shareholders in corporate governance issues.

Choosing corporate directors and limiting executive pay would be the natural by-product of these efforts.
Whatever most other industrialized countries have adopted should be good starting point.

We don’t have to reinvent the wheel.

Speaking of wheels, when Chrysler was purchased by Mercedes-Benz a few years back, the first thing Mercedes told Chrysler’s top management was that the gravy train was ending.

They would not be paid more than Germany’s top management wage scale. Chrysler may have since fallen on hard times since then, but at least during its Mercedes era, we didn’t have grotesque management compensation adding insult to injury.

While Congress is currently pondering the thought of doing away with the SEC altogether, that would be throwing the baby out with the bathwater. Meanwhile, Arthur Levitt would be great to have back on board.

The former and longest-serving SEC chairman wrote the book “Take on the Street” a few years ago. The subtitle was, “What Wall Street and Corporate America Don’t Want You to Know — What You Can Do To fight Back.”

Arthur Levitt’s book illustrates the extent to which the SEC is heavily politicized.

After all, the agency exists at the will of Congress, so it can’t be immune to political pressure.

Until the wheels totally fell off during the most recent regime, it was one of the most bipartisan departments — well-insulated from the graft and corruption that politics can introduce.

Hopefully, there are signs that this independence will become the norm once again. Shapiro’s other choices for top administrators include the irrepressible Harvey Pitt who was fired a few years back for, among other things, trying to make the SEC chairmanship a cabinet level post, but he is reputed to be extremely knowledgeable and tenacious.

Now that he has the right handlers, we can expect more from him.

When we look back on this “downdraft” a few years from now, I think we’ll conclude that it was one of the best things that could have happened to us. Corporate governance and responsible management have become an increasing right to us stockholders with every pay period’s 401(k) deposit.

Until this crisis, we were heading for a world with no regulation and no opportunity to even initiate lawsuits against companies that were ripping us off. This time, we have finally driven a spike through the heart of what C. Wright Mills called “The Power Elite” in his ’50s era book on the limitless control of modern corporate management. This experience is costing us all something, no question, but we have to remember, “No pain; No gain.”