The new federal law known as COBRA (Consolidated Omnibus Budget Reconciliation Act) may contain a hidden bonus for some small companies -- a provision that will allow many of them to save money on the benefits they offer employees hired away from larger companies. The provision requires employers to give departing employees the option of continuing their health-insurance coverage for up to 18 months. The employee has to pay for the coverage, but the tab can't be more than 2% over the employer's cost. Since large companies enjoy a significant rate advantage (often 20%, by one estimate), a small company may find that it makes sense to reimburse new employees for continued coverage under their previous plans.
The reimbursements would, of course, be taxable income for the employee, which could reduce, or even eliminate, the savings to new employers who cover the tax as well as the insurance cost. But COBRA could prove a boon to other companies, especially start-ups, notes William J. Cammock, president of Cammock, Cammock & Tallitsch Inc., a benefits-and-compensation consulting firm in Cleveland. Some of them may find that the law lets them avoid the hassle of establishing health-insurance plans altogether, at least during their early months of operation.