Venom aimed at COBRA

Published: May 15, 2009
Philadelphia Business Journal
By Jeff Blumenthal

Curt Hudson
CEO Nick Hackett of New Way Air Bearings in one of the
machine shop areas of the production floor. This set of
grinders, before layoffs, ran 24 hours a day with two people.
Now run by one person on an as-needed basis.

Small business owners are smarting over a provision in the Obama administration’s stimulus package that requires them to pay 65 percent of COBRA health care insurance benefits to laid-off former employees.

While the requirement, announced in February, was meant to ease the financial burden on those who lost their jobs because of the recession, it has caused cash-flow problems — and in one case a few more layoffs — for businesses that were already struggling.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986 allows qualified terminated employees to continue their health-care coverage until they find another job that provides employer-sponsored health insurance.

Nick Hackett, CEO of Aston-based New Way Air Bearings, a manufacturer of precision air bearings for products such as semiconductors, flat-panel screens and CAT-scan machines, has been grappling with COBRA problems.

Founded in 1994, New Way Air grew from $3.5 million in assets to $10 million in the past six years. It had 75 employees before a lack of demand for its products from manufacturers late last year resulted in three separate rounds of layoffs of 38 total employees. The remaining employees either work four-day weeks or took a 20 percent pay cut so the company can weather the downturn.

Hackett gave an example of his dilemma. Flat-panel screens accounted for 40 percent of sales last year and are only 5 percent this year.

As he was contemplating a third round of layoffs earlier this year, the federal government unveiled the American Recovery and Reinvestment Act of 2009, which included expanded eligibility for COBRA and provides a premium reduction to certain qualified individuals who lost their job on or after last Sept. 1 through the end of this year. It took effect March 1.

Hackett wound up making the third round of job cuts earlier and deeper than he would have without the COBRA initiative.

While the government reimburses employers at the end of each quarter for the added COBRA expenses, Hackett said the program has created a serious cash-flow problem.

“We are losing about $20,000 in cash per quarter and that puts pressure on us,” Hackett said. “The additional cost may have forced us to lay off one or two more people than we would have.”

Hackett said the company came close to filing for bankruptcy, partly because of the lack of cash flow.

Sam First, a labor and employment lawyer with Jacobs Law Group, said Hackett is just one of many small business clients crippled by the additional upfront costs, which he said often results in more layoffs.

“We’re getting a lot of calls,” First said. “Business owners are not happy, but they have no choice but to pay it. We just tell them they have to plan for it when considering a reduction in force.”

Carol Tavella, a consultant with the benefits and compensation practice of Smart Business Advisory and Consulting, said there has been a lack of clarity that has hindered implementing the legislation. Specifically, she said the government has not defined what qualifies as “involuntary termination,” the phrase used to describe who is eligible for the benefit.

Kevin Shivers, state director for the Pennsylvania chapter of the National Federation of Independent Business, said his constituency is telling him that the new COBRA responsibility is a huge burden because the federal act affects all businesses with 20 employees or more.

“They can least afford to fork out additional dollars,” Shivers said. “They are not large enough to self-insure [companies must have at least 50 employees in Pennsylvania for that]. So if a laid-off employee becomes ill, the company’s insurance premium will rise the following year.”

Shivers said that will lead many businesses to cut or reduce coverage.

The Pennsylvania legislature is considering adopting a bill to provide a similar benefit to laid-off workers from companies with between two and 20 employees. But Shivers said it would call for insurance companies to pick up the 65 percent burden rather than employers.